2000/07 LEM Working Paper Series

Endogenous Growth in Open-Ended Economies with Locally Interacting Agents
Giorgio Fagiolo
Innovation, Endogenous Growth, Local Interactions, Exploitation vs. Exploration

Building on some general properties of the empirical patterns of technological diffusion and innovation, the paper presents a simple model in which self-sustaining growth endogenously emerges as the result of imperfect coordination among stylized, boundedly rational, heterogeneous, firms locally interacting in an open-ended technological space and are able to modify the set of their 'nearest-neighbors'. We allow the system to be characterized by: (i) endless opportunities of introducing either 'incremental' or 'radical' innovations; (ii) path-dependency in learning achievements; (iii) dynamic increasing returns grounded upon collectively shared 'knowledge bases'. By means of extensive Montecarlo studies, we identify necessary conditions for patterns of persistently fluctuating exponential growth to be generated in the economy. We also investigate causal relationships between system/behavioral parameters tuning the sources of growth and: (a) the overall performance of the economy; (b) the emrgence of the exploitation-exploration trade-off; (c) the ability of the system to self-organize and generate GNP time-series of exponential grwth with small growth-rates long-run volatility and statistical properties similar to those exhibited by empirical observed ones. Finally, the effects of behavioral heterogeneity on aggregate outcomes are analyzed and a simple example is presented in which collective economic growth finds its necessary condition in the presence of a share of 'irrational' individuals in the population.


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