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An Entropy-Constrained Model of Induced Technical Change with a Single Innovation Possibility Frontier

Jangho Yang ()
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Jangho Yang: Department of Economics, New School for Social Research

No 1714, Working Papers from New School for Social Research, Department of Economics

Abstract: This paper proposes an entropy-constrained model of induced technical change (ITC) and estimates the innovation possibilities frontier (IPF) of the OECD countries. The ITC model captures endogenous dynamics of technical progress driven by competition among capitalists to lower production costs. However, its assumption that the typical capitalist is able to maximize cost reductions with complete certainty leads to the implausible result that all capitalists end up being on the technological frontier. The entropy constrained ITC model generalizes the canonical model by allowing the economic agent to have a positive degree of uncertainty. This leads to a qualitatively different result in that the solution of the same maximization problem is not a single point on the frontier but a probability distribution of the possible states of the technological change. The Bayesian inference is then employed and successfully recovers the single IPF of the entropy constrained ITC model for the OECD countries.

Keywords: Induced technical change; innovation possibilities frontier; entropy constrained model; Bayesian inference (search for similar items in EconPapers)
JEL-codes: C11 C15 D01 D24 D80 O33 O4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff, nep-hme, nep-ino, nep-ore and nep-tid
Date: 2017-04
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http://www.economicpolicyresearch.org/econ/2017/NSSR_WP_142017.pdf First version, 2017 (application/pdf)

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