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An Entropy-Constrained Model of Induced Technical Change with a Single Innovation Possibility Frontier

Author

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  • Jangho Yang

    () (Department of Economics, New School for Social Research)

Abstract

This paper proposes an entropy-constrained model of induced technical change (ITC) and estimates the innovation possibilities frontier (IPF) of the OECD countries. The ITC model captures endogenous dynamics of technical progress driven by competition among capitalists to lower production costs. However, its assumption that the typical capitalist is able to maximize cost reductions with complete certainty leads to the implausible result that all capitalists end up being on the technological frontier. The entropy constrained ITC model generalizes the canonical model by allowing the economic agent to have a positive degree of uncertainty. This leads to a qualitatively different result in that the solution of the same maximization problem is not a single point on the frontier but a probability distribution of the possible states of the technological change. The Bayesian inference is then employed and successfully recovers the single IPF of the entropy constrained ITC model for the OECD countries.

Suggested Citation

  • Jangho Yang, 2017. "An Entropy-Constrained Model of Induced Technical Change with a Single Innovation Possibility Frontier," Working Papers 1714, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1714
    as

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    File URL: http://www.economicpolicyresearch.org/econ/2017/NSSR_WP_142017.pdf
    File Function: First version, 2017
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    References listed on IDEAS

    as
    1. Gérard Duménil & Dominique Lévy, 1995. "A Stochastic Model Of Technical Change: An Application To The Us Economy (1869–1989)," Metroeconomica, Wiley Blackwell, vol. 46(3), pages 213-245, October.
    2. Foley, Duncan K., 2010. "What's wrong with the fundamental existence and welfare theorems?," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 115-131, August.
    3. Foley Duncan K., 1994. "A Statistical Equilibrium Theory of Markets," Journal of Economic Theory, Elsevier, vol. 62(2), pages 321-345, April.
    4. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    5. Luo Yulei & Young Eric R, 2009. "Rational Inattention and Aggregate Fluctuations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-43, April.
    6. Smith, Eric & Foley, Duncan K., 2008. "Classical thermodynamics and economic general equilibrium theory," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 7-65, January.
    7. Foley, Duncan K., 2003. "Endogenous technical change with externalities in a classical growth model," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 167-189, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Induced technical change; innovation possibilities frontier; entropy constrained model; Bayesian inference;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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