Diffusion in a simple classical model. Micro decisions and macro outcomes

CSWP 6 (September 2014)

Author David Haas and Andreas Rainer

Keywords Sraffa, Schumpeter, classical economics, diffusion, replicator dynamics

JEL E11, O33, O41

The paper explores how a single-sector economy reaches its long-period position
if multiple methods of production are simultaneously in use. Firm
decisions on investment and on technology provide the basis for two possible
mechanisms of convergence: differential growth and imitation. Both mechanisms
rely on the concept of extra profits and imply that during a period of
disequilibrium economically superior methods of production gradually supersede
inferior ones. The model reproduces the stylized fact of sigmoid diffusion
curves and shows that diffusion leads to uneven growth with ambiguous long
term effects, a change of income distribution and of the industry structure.

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