Collins Conference Room
Seminar

Massimo Ricottilli (University of Bologna)

This paper attempts to model investment in capital goods resulting solely from waves of innovation.  Investment is induced endogenously through the profit opportunities that firms' innovative activity conjures up:  a costly search process warranted by future expected profits eventually leading to a successful innovation requiring new capital goods to be realized.  It is shown to be a gradual, localized and idiosyncratic process that requires investment of labor in its own right and that is directed at both independent discovery and to learning from others innovators through informative spillovers.  The first section of this paper deals with employment in specialized labor and determines the incentive for technology-embodying investment.  The second section analyzes firms' interaction as a self-organization process in which a gradual and stochastic build-up of informational bits leads to some becoming innovators.  The solution of the implied dynamics allows to determine their number.  The third section sets up the macroeconomic equilibrium consistent both with the upsurge in investment demand and output of capital goods.  It is shown that a mismatch emerges between profit expectations and profit realization.  Finally, the fourth section deals with the imitation as a Poisson arrival process that leads to further investment in capital goods gnawing away the innovators' quasi-rents.

SFI Host:  J. Doyne Farmer

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