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Optimal Diversity in Investments with Recombinant Innovation

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  • Jeroen C.J.M. van den Bergh

    ()
    (VU University Amsterdam, and Autonomous University of Barcelona)

  • Paolo Zeppini-Rossi

    ()
    (University of Amsterdam)

Abstract

We address the notion of dynamic, endogenous diversity and its role in theories of investment and technological innovation. We develop a formal model of an innovation arising from the combination of two existing modules with the objective to optimize the net benefits of diversity. The model takes into account increasing returns to scale and the effect of different dimensions of diversity on the probability of emergence of a third option. We obtain analytical solutions describing the dynamic behaviour of the values of the options. Next we optimize diversity by trading off the benefits of diversity (due to recombinant innovation) and the benefits associated with returns to scale. We derive conditions for optimal diversity under different regimes of returns to scale. When the investment time horizon is beyond a threshold value, the best choice becomes diversity. This threshold will be larger the higher the returns to scale.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-091/1.

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Date of creation: 24 Sep 2008
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Handle: RePEc:dgr:uvatin:20080091

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Keywords: balance; diversity; increasing returns; recombinant innovation; scale effects;

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References

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  1. Lee Fleming, 2001. "Recombinant Uncertainty in Technological Search," Management Science, INFORMS, vol. 47(1), pages 117-132, January.
  2. Zeppini Rossi, P. & Bergh, J.C.J.M. van der, 2008. "Optimal Diversity in Investments with Recombinant Innovation," CeNDEF Working Papers 08-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
  4. Geels, Frank W., 2002. "Technological transitions as evolutionary reconfiguration processes: a multi-level perspective and a case-study," Research Policy, Elsevier, vol. 31(8-9), pages 1257-1274, December.
  5. Jan W. Rivkin & Nicolaj Siggelkow, 2003. "Balancing Search and Stability: Interdependencies Among Elements of Organizational Design," Management Science, INFORMS, vol. 49(3), pages 290-311, March.
  6. Andy Stirling, 2007. "A General Framework for Analysing Diversity in Science, Technology and Society," SPRU Working Paper Series 156, SPRU - Science and Technology Policy Research, University of Sussex.
  7. van den Heuvel, Stijn T.A. & van den Bergh, Jeroen C.J.M., 2009. "Multilevel assessment of diversity, innovation and selection in the solar photovoltaic industry," Structural Change and Economic Dynamics, Elsevier, vol. 20(1), pages 50-60, March.
  8. Weitzman, M.L., 1991. "On Diversity," Harvard Institute of Economic Research Working Papers 1553, Harvard - Institute of Economic Research.
  9. Sendil K. Ethiraj & Daniel Levinthal, 2004. "Modularity and Innovation in Complex Systems," Management Science, INFORMS, vol. 50(2), pages 159-173, February.
  10. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-31, March.
  11. Frenken, Koen & Saviotti, Paolo P. & Trommetter, Michel, 1999. "Variety and niche creation in aircraft, helicopters, motorcycles and microcomputers," Research Policy, Elsevier, vol. 28(5), pages 469-488, June.
  12. van den Bergh, Jeroen C.J.M., 2008. "Optimal diversity: Increasing returns versus recombinant innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 565-580, December.
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Cited by:
  1. Zeppini Rossi, P. & Bergh, J.C.J.M. van der, 2008. "Optimal Diversity in Investments with Recombinant Innovation," CeNDEF Working Papers 08-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  2. Paolo Zeppini & Jeroen C.J.M. van den Bergh, 2010. "Competing Recombinant Technologies for Environmental Innovation," Tinbergen Institute Discussion Papers 10-107/1, Tinbergen Institute.
  3. Paolo Zeppini & Jeroen C.J.M. van den Bergh, 2010. "Competing Recombinant Technologies for Environmental Innovation," Tinbergen Institute Discussion Papers 10-107/1, Tinbergen Institute.
  4. Van den Bergh, J.C.J.M. & Zeppini Rossi, P., 2010. " Competing Recombinant Technologies for Environmental Innovation: Extending Arthur’s Model of Lock-in Abstract: This article presents a model of sequential decisions about investments in enviro," CeNDEF Working Papers 10-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

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