Abstract
This work presents an evolutionary model of output and investment dynamics yielding endogenous business cycles. The model describes an economy composed of firms and consumers/workers. Firms belong to two industries. The first one performs R&D and produces heterogeneous machine tools. Firms in the second industry invest in new machines and produce a homogenous consumption good. Consumers sell their labor and fully consume their income. In line with the empirical literature on investment patterns, we assume that firms’ investment decisions are lumpy and constrained by their financial structure. Simulation results show that the model is able to deliver self-sustaining patterns of growth characterized by the presence of endogenous business cycles. The model can also replicate the most important stylized facts concerning micro- and macro-economic dynamics.
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Notes
See, e.g., the sharp critique to the “representative agent fallacies” in Kirman (1989).
See Caballero (1999).
Different extrapolative expectation-formation rules based on both firm-specific past demand and aggregate market signal are explored in Dosi et al. (2006). Interestingly, one finds that increasing the computational sophistication of agents does not improve either the performance of the economy, as measured by average growth-rates, or the stability of growth patterns over time.
We assume that there are no secondary markets for capital goods. Hence, firms have no incentives to reduce their capital stock.
We employ consumption-good firm sales as a proxy of firm size. Before pooling our data, we normalize each observation by the year-average of firm size in order to remove any time trends in our data. This allows us to get stationary size and growth distributions across years. Due to space constraints, we show the rank-size plot and the firm growth rate distribution plot for the work-or-die scenario only.
Subbotin densities include as special cases the Normal (shape parameter β = 2) and the Laplace (β = 1) distributions. More on the application of the Subbotin family to the fitting of firm growth rates is in Bottazzi and Secchi (2006).
All results refer to T = 600 time-periods, cf. Table 2. This econometric sample size is sufficient to allow for convergence of recursive moments of all statistics of interest.
Note also that the ex post identity between savings and investments is always satisfied.
Firm-productivity auto-correlations (up to lag 6) are computed by considering normalized productivity of firms that survived for at least 40 periods in the last 100 periods of any simulation run.
For example, the demand side of the economy, as well as the labor market, are not explicitly modeled. A more detailed microfoundation of such admittedly neglected ingredients is one of the main points in our agenda.
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Thanks to Giulio Bottazzi, Andrea Ginzburg, Marco Lippi, Marco Mazzoli, Mauro Napoletano and Sandro Sapio. All usual disclaimers apply.
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Dosi, G., Fagiolo, G. & Roventini, A. The microfoundations of business cycles: an evolutionary, multi-agent model. J Evol Econ 18, 413–432 (2008). https://doi.org/10.1007/s00191-008-0094-8
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DOI: https://doi.org/10.1007/s00191-008-0094-8
Keywords
- Evolutionary dynamics
- Agent-based computational economics
- Lumpy investment
- Output fluctuations
- Endogenous business cycles