The Dynamics of Innovation (superseded by DP #1546)
AbstractWe analyze social learning and innovation in an overlapping generations model in which available technologies have correlated payoffs. Each generation experiments within a set of policies whose payoffs are initially unknown and drawn from the path of a Brownian motion with drift. Marginal innovation consists in choosing a technology within the convex hull of policies already explored and entails no direct cost. Radical innovation consists in experimenting beyond the frontier of that interval, and entails a cost that increases with the distance from the frontier, and may decrease with the best technology currently available. We study how successive generations alternate between radical and marginal innovation, in a pattern reminiscent of Schumpeterian cycles. Even when the underlying Brownian motion has a positive drift, radical innovation stops in finite time. New generations then fine-tune policies in search of a local optimum, converging to a single technology. Our analysis thus suggests that sustaining radical innovation in the long-run requires external intervention.
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Bibliographic InfoPaper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1516.
Date of creation: 09 Dec 2010
Date of revision:
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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Web page: http://www.kellogg.northwestern.edu/research/math/
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Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- O3 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights
- O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-30 (All new papers)
- NEP-INO-2011-01-30 (Innovation)
- NEP-KNM-2011-01-30 (Knowledge Management & Knowledge Economy)
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