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Impact of Environmental Dynamics on Economic Evolution: Uncertainty, Risk Aversion, and Policy

Volker Nannen, Jeroen van den Bergh and A. E. Eiben

MPRA Paper from University Library of Munich, Germany

Abstract: The general question of how environmental dynamics affect the behavioral interaction in an evolutionary economy is considered. To this end, a basic model of a dynamic multi-sector economy is developed where the evolution of investment strategies depends on the diversity of investment strategies, social connectivity and relative contribution of sector specific investments to production. Four types of environmental dynamics are examined that differ in how gradual and how frequent environmental change occurs. Numerical analysis shows how the socially optimal level of diversity increases with the frequency and rapidity of the changes. When there is uncertainty about which type of environmental dynamics will prevail, the socially optimal level of diversity increases with the degree of risk aversion of the policy maker or the society.

Keywords: evolutionary economics; agent-based economics; dynamic environments; public policies; risk aversion; uncertainty (search for similar items in EconPapers)
JEL-codes: D81 B52 Q51 O31 (search for similar items in EconPapers)
Date: 2008
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