Pilot Early, Commit Late: A Real-Options Model of Enterprise AI Adoption under Rapid Technological Progress
Real-options model shows firms should pilot AI early and commit late because rapid frontier progress raises experimentation value over irreversible deployment.
The paper builds a two-period decision model where firms choose among immediate AI deployment, a limited pilot, or waiting under frontier uncertainty. It derives five timing results plus a comparative result on where learning occurs, including that frontier uncertainty raises the value of waiting and piloting. Valuable organization-specific learning creates a region where 'pilot early, commit late' is optimal, and a closed-form modularity threshold exists above which immediate deployment dominates. A continuous-time extension recovers the standard result that uncertainty raises adoption thresholds while capability and modularity lower them.