Multigame models of innovation in evolutionary economics

We incorporate information measures representing knowledge into an evolutionary model of coevolving firms and markets whereby the growing orderliness of firms potentiates a predictable progression of market exchange innovations which themselves become beneficial only with the growing orderliness of firms. We do this by generalizing Nelson and Winter style evolutionary models which are well suited to the study of entry, exit, and growth dynamics at the level of individual firms or entire industries. The required innovation is to use information measures to impose an order on the routines constituting a firm, and by correlating order with firm profitability, allow the preferential selection of innovations which increase order. In this viewpoint, the coherent mathematical framework provided by information and probability theory describes firm orderliness and variability, as well as all selection operations. This informational approach allows modelling the synergistic interactions between routines in a single firm and between different firms in a general but comprehensive manner, so that we can successfully model and predict innovations specifically focussed on organizational order. In particular, we can predict the coevolution over time of firm organizational complexity and of increasingly sophisticated market exchange mechanisms for routines permitting that increased organizational order. We demonstrate our approach using numerical simulations and analytic techniques exploiting a multigame player environment.