Economic Dynamics Models with Innovations: A Probabilistic Approach

Arkin, V.I. (1989). Economic Dynamics Models with Innovations: A Probabilistic Approach. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-89-099

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Abstract

The objective of this paper is twofold. First, to include innovation processes with costly implementation (emergence and propagation of new technologies) into the classical theory of economic dynamics models. Second, to show that the transition to the stochastic setting of the problem allows to partially eliminate difficulties due to the discrete nature of innovations' emergence, leading to, in the deterministic case, nonconvex extremal problems. This presentation is based on the classical Gale model in the simplest situation when the technology is extended only once. In this case, a non-standard, two-stage stochastic programming problem with controlled measure is shown to emerge.

The main results consist of a description of the structure of the dual variables (stimulating prices) and some related indicators of economic efficiency taking into account the probabilistic nature of the model. The major role in the system of economic indicators constructed is played by the new technology estimates arising due to the consideration of uncertainty and the lack of deterministic counterparts.

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