EpidemicmodelsinEconomics:OriginsJ.A.Schumpeter(TheoryofEconomicDevelopment1912). Distinction between invention,innovation and diffusionEarlydemandbasedmodels(Mansfield,1968)TechnischeUniversiteitTUEindhovenUniversityofTechnology10/3/2013PAGE10EconomicsofInnovation2013
Epidemic models in Economics: Origins • J.A. Schumpeter (Theory of Economic Development, 1912) • Distinction between invention, innovation and diffusion • Early demand based models (Mansfield, 1968) Economics of Innovation 2013 10/3/2013 PAGE 10
J.A.Schumpeter:Distinctionbetweeninvention,innovation,diffusionCreatorImitatorEntrepreneurInventionInnovationDiffusionSocietyIdeaMarketHighestHighestIntellectualbenefitstobenefitstoproperty ofSocietyfirmindividualTechnischeUniversiteitTUEindhoveneUniversity of Technology10/3/2013PAGE11EconomicsofInnovation2013
J.A. Schumpeter: Distinction between invention, innovation, diffusion Economics of Innovation 2013 10/3/2013 PAGE 11 Invention Innovation Diffusion Creator Entrepreneur Imitator Idea Market Society Highest benefits to Society Highest benefits to firm Intellectual property of individual
Economicmodels:MansfieldsextensionofepidemicmodelsCriticalassumptionsofepidemicmodels:AdoptiontakesplaceuponreceivinginformationonexistenceMansfield(1968):Notknowledgeonexistencebutuncertaintysurroundingnewtechnologyasa result of poorperformancecharacteristics of suchtechnology>deterredforrisk-aversefirmsUncertaintyisreducedovertimeasaresultof learningfromexperienceB=b+b元+bK+8Rateofdiffusion(β):functionofprofitabilityofinstallingnewtechnology()andtheabsolutecapitalrequirements(K)ofdoingsoTechnische UniversiteitTUEindhovenUniversityofTechnology10/3/2013PAGE12EconomicsofInnovation2013
Economic models: Mansfields extension of epidemic models • Critical assumptions of epidemic models: Adoption takes place upon receiving information on existence • Mansfield (1968): Not knowledge on existence but uncertainty surrounding new technology as a result of poor performance characteristics of such technology > deterred for risk-averse firms • Uncertainty is reduced over time as a result of learning from experience • Rate of diffusion (β): function of profitability of installing new technology (π) and the absolute capital requirements (K) of doing so Economics of Innovation 2013 10/3/2013 PAGE 12 b b bK 1 2 3