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The Dynamics of Innovation (superseded by DP #1546)

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  • Umberto Garfagnini
  • Bruno Strulovici

Abstract

We 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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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1516.

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Date of creation: 09 Dec 2010
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Handle: RePEc:nwu:cmsems:1516

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Keywords: Schumpeter cycles; experimentation; social learning; R&D; intergenerational externalities JEL Classification Numbers: D83; D92; O3; O4;

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