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Optimal Diversity in Investments with Recombinant Innovation

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Author Info
Jeroen C.J.M. van den Bergh () (VU University Amsterdam, and Autonomous University of Barcelona)
Paolo Zeppini-Rossi () (University of Amsterdam)

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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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Publisher 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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Related research
Keywords: balance; diversity; increasing returns; recombinant innovation; scale effects;

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Find related papers by JEL classification:
B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Institutional; Evolutionary
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Weitzman, Martin L, 1992. "On Diversity," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 363-405, May. [Downloadable!] (restricted)
    Other versions:
  2. Andy Stirling, 2007. "A General Framework for Analysing Diversity in Science, Technology and Society," SPRU Electronic Working Paper Series 156, University of Sussex, SPRU - Science and Technology Policy Research. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Jeroen C.J.M. van den Bergh & Paolo Zeppini-Rossi, 2008. "Optimal Diversity in Investments with Recombinant Innovation," Tinbergen Institute Discussion Papers 08-091/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  6. 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. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  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. [Downloadable!]
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