former Evolutionary Economics Group

While several plots of the aggregate age distribution suggest that firm age is exponentially distributed, we find some departures from the exponential benchmark. At the lower tail, we find that very young establishments are more numerous than expected, but they face high exit hazards. At the upper tail, the oldest firms are older than the exponential would have predicted. Furthermore, the age distribution of international airline companies displays multimodality. Although we focused on departures from the exponential, we found that the exponential was a useful reference point and endorse it as an appropriate benchmark for future work on industrial structure.

The functionality of organizational routines, i.e. the factual value for accomplishing their purposes, is an important constraint on the capabilities an organization can bring to bear on its operations. Often falling short of its potential, the actual make-up of organizational routines invites managerial attention. Of the criteria by which the functionality can be assessed, the generic one discussed in this paper is whose interests this make-up serves. This is determined by the conditions under which organizational routines emerge, particularly the cognitive and motivational attitudes of the organization members involved at this stage. By uncovering how these enhance or impair a routine's functionality for the organization's goals, the paper corroborates the relevance of an individualistic approach in organizational theory.

This paper shows how cognitive human dispositions that take effect at the level of an individual firm's corporate culture have repercussions on an industry's evolution. In our theory, the latter is attributable to evolving corporate cultures coupled with changes in a firm's business environment. With the help of a formal model of evolving corporate cultures, we demonstrate how firms can establish a cooperative cultural regime that yields competitive advantages in an innovative, fast changing environment. Depending on within-firm social learning processes and cognitive constraints of human agents, organizations then reach a critical cognitive firm size in their development beyond which the level of cooperation deteriorates rapidly – they systematically face a growth crisis. Organizations successful in such an environment and reaching a critical technological size may, however, reap economies of scale in a later, mature and stable business environment with altered corporate culture. Furthermore, we relate these findings to empirical evidence on firm survival and performance in different industries, the evolution of organizational structures, technological advancements in production technologies, and identify some determinants of market structures.

The question of whether and when to enter a newly emerging product market has been the focus of practitioners as well as researchers. This paper contributes to the literature by investigating the order of entry as well as pre-entry experiences with a population-based approach for the radically new product market of multifunctional machine tools for the case of Germany between 1949 and 2002. Estimation results show, that later entrants outperform pioneers. Moreover, it turns out that industry and technology specific capabilities do not increase survival chances. But when decomposing the known positive age effect on survival, we see that particularly dynamic capabilities, i.e. the competence to integrate additional business activities into the current product portfolio, significantly lower the risk of failure in the new product market.

Using a new dataset encompassing more than 2,200 inventions made by Max Planck Society researchers from 1980 to 2004, we explore how licensee and technology characteristics affect the licensing and commercialization of technologies from public research. We find no evidence that spin-offs and external licensees systematically differ in their likelihood of successful commercialization. Technologies licensed to foreign firms are less often commercialized, which may reflect selection effects. Patented technologies and inventions by senior scientists are more likely to be licensed, but patent protection is related to lower commercialization odds and lower royalty payments. (PDF)

The theoretical consistency and practical applicability of traditional welfare economics has long been subject to controversy. More recently the challenge has been added from evolutionary approaches that the individual preferences on which the welfare calculus is based are themselves subject to change. The purpose of the present paper is twofold. It takes, firstly, a closer look at the discussion on the need and feasibility of an evolutionary welfare economics that accommodates evolving preferences. The particular focus is on proposal advanced by three authors, Carl Christian von Weizsäcker, Ulrich Witt and Robert Sugden. And it seeks, secondly, to show that the constitutional economics paradigm can deal with the evolving-preferences-issue in a more coherent and consistent way than approaches that remain within the mind-frame of welfare economics.

published in: “Evolving Preferences and Welfare Economics: The Perspective of Constitutional Political Economy”, in Jahrbücher für Nationalökonomie, Heft 02-03, 2014, pp. 328-349

Informed or rational desire, capability and prudential value list views of well-being - must accommodate human limitations, as well as address issues about adaptation and paternalism. They sometimes address adaptation by toughening the requirement(s) on those desires, satisfaction of which constitutes well-being. That exacerbates a concern that these accounts if adopted will encourage policies which override actual desires and enforce paternalistic restrictions. Sunstein, like Sen, invokes democratic deliberation to address the adaptation problem, and advocates autonomy promoting paternalistic restrictions. Sunstein and Thaler's 'libertarian paternalism' extends this flavour of argument to cover examples of irrationality from behavioural economics. Their variation of the informed desire account involves highly idealized preferences which cannot, in practical terms, guide a paternalistic social planner, but lead to a potentially large range of cases where paternalistic intervention might, in principle, be justified. I argue that the liberal paternalist policy agenda should as currently conceived be resisted. (PDF)

Recently, evidence from behavioural research has given rise to new arguments against anti-paternalism. This anti-anti-paternalism argues that certain kinds of paternalism - interventions in people's choices that improve their own good - are indeed permissible even when people's liberty is an important objective. These permissible kinds of paternalism are distinguished from non-permissible kinds by their characterisation as 'soft','weak', 'libertarian' or 'asymmetric'. In this paper, I argue that this distinction is based on the way 'people's good' is characterised: soft paternalists seek to respect the internalist intuition that for something to be a good to someone, she must be capable of caring about it. I show that this commitment conflicts with the behavioural evidence, if the welfare notion is not carefully specified. First, I review a number of possible welfare concepts and show that they do not resolve this conflict. Second, I discuss a welfare notion that respects the internalist intuition and does not conflict with the behavioural evidence. Soft paternalists, for better or worse, are committed to welfare notions of this form; the plausibility of the anti-anti-paternalist argument thus depends on the workability of such a concept. (PDF)

Beginning in 1922, the rate of exit of U.S. tire producers increased sharply and the industry began a severe and protracted shakeout. Just five years earlier, the tire industry experienced a surge in entry that led to a rise of over 80% in the number of producers. We propose an explanation for this episode based on the idea of industry submarkets, which we incorporate in a model of shakeouts. We test this theory and alternative explanations for the surge in entry and exit and the shakeout using a novel data set on patenting in tires and production in the early 1920s of the cord tire, a key innovation we feature in our theory. Our analysis suggests that the development of a new submarket can open up opportunities for entry but also stimulate innovation and in the process reinforce the advantages of the leading incumbents, accentuating the shakeout of producers.

We present two new notions of evolutionary stability, the truly evolutionarily stable state (TESS) and the generalized evolutionarily stable equilibrium (GESE). The GESE generalizes the evolutionarily stable equilibrium (ESE) of Joosten [1996]. An ESE attracts all nearby trajectories monotonically, i.e., the Euclidean distance decreasing steadily in time. For a GESE this property should holds for at least one metric. The TESS generalizes the evolutionarily stable strategy (ESS) of Maynard Smith & Price [1973]. A TESS attracts nearby trajectories too, but the behavior of the dynamics nearby must be similar to the behavior of the replicator dynamics near an ESS. Both notions are defned on the dynamics and immediately imply asymptotical stability for the dynamics at hand, i.e., the equilibrium attracts all trajectories sufficiently nearby. We consider this the relevant and conceptually right approach in defining evolutionary equilibria, rather than defining a static equilibrium notion and search for appropriate dynamics guaranteeing its dynamic stability. Moreover, the GESE and the TESS take similar positions as the ESE and ESE do in relation to other equilibrium and fixed point concepts in general. (PDF)

Economic change, while promoting innovation and growth, at the same time generates "gales of creative destruction". It is still largely unclear what this concept implies for the task of assessing welfare (and, correspondingly, the need for and scope of policy-making) in a novelty-generating, knowledge-based economy. Is novelty desirable per se? Is a rise of living standards due to innovation always worth the risks involved? Standard welfare economics is inherently incapable of answering these questions. By examining Joseph Schumpeter's explicit and implicit reasoning on welfare and linking his thoughts to recent ideas, within normative economics, on how to redefine "well-being" when preferences are variable and inconsistent, we argue that in an evolving economy, well-being should not be conceptualized in static preference-satisfaction terms, but rather in partly procedural terms of "effective preference learning".

As people become richer they get the opportunity of consuming more but also qualitatively better goods. This holds for a basic commodity like food as well. We investigate food consumption in Russia, taking into account both expenditure and nutrition value in terms of calories. We analyze how food consumption patterns change with increasing income by estimating both "quantity Engel curves" and "quality Engel curves". The former describe the functional dependence of calories consumed on total expenditure. The latter trace out the dependence of price per calorie as a proxy for quality on total expenditure. We compare income elasticities of quantity with income elasticities of quality. In these Russian data for years 2000-2002 the reaction of quality to changes in income is significantly stronger than the reaction of quantity to income changes suggesting that Russian households tend to choose higher quality food items as income rises. (PDF)

Extrinsic motivations like intellectual property protections and fiscal incentives continue to occupy the centre stage in debates on innovation policies. Joseph Schumpeter had, however, argued that the motive to accumulate private property can only explain part of innovative activities. In his view, "the joy of creating, of getting things done" associated with the behavioural traits that "seek out difficulties…and takes delight in ventures" stand out as the most independent factor of behaviour in explaining the process of economic development, especially in early capitalist societies. Taking the case of 'grassroot' innovators in India, we re-examine the motivations behind innovative behaviour. We draw upon the literature on effectance motivation theory to construct operational indicators of extrinsic and intrinsic motivations. Interestingly, we find that pure extrinsic forms of motivation drive only a fraction of individual innovative behaviour. Also, importance of intrinsic motivation in guiding innovative behaviour is found to high when uncertainty is high. We accordingly draw a few policy implications.

The paper gives attention to the question of whether the development of evolutionary theories in biology over the last twenty years has any implications for evolutionary economics. Though criticisms of Darwin and the modern synthesis have always existed, most of them have not been widely accepted or have been absorbed by the mainstream. Recent findings in evolutio¬nary biology have started to question again the main principles of the modern synthesis. These findings suggest amongst others that the phenomena of co-operation, communication, and self-organization have been under-estimated, and that selection is not the predominant factor of evolution, but only one among many. Thus, in evolutionary economics, the question is whether the popular variation-retention-selection principle is still up to date. The implications for evolutionary economics with respect to analogies, generalized Darwinism, and the continuity hypothesis are also addressed. (PDF)

Technology and technological change play a central role in economics, whether in the theory of resource allocation or in the theory of growth and development. Yet the nature of technology is largely ignored in economic theory, it being considered sufficient to treat technology as a constraint on productive opportunities. This short essay delves a little deeper into the nature of technology and the material, energy and information transformation processes that it represents. A deeper understanding of technology leads to a deeper understanding of the main currents of technological advance and to the reasons why the development of technology and its application are so uneven over time and place.

According to the advocates of a "Generalized Darwinism" (GD), the three Darwinian principles of variation, selection and retention can and should be used as a meta-theoretical framework for the explanation of evolutionary processes in the socio¬cultural domain. Despite their biological origins, GD aims at redefining them in a way that is supposed to abstract from any domain-specific particulars. We argue that in order to qualify as an adequate meta-theoretical framework for evolutionary economics, GD should be able to support and inspire viable practical policy implications. After examining its potential to do so, however, we conclude that GD risks systematically misguiding evolutionary policy advice.

We analyze the rise and decline of the steel and mining industries in the regions of Saarland, Lorraine und Luxemburg over a long period, from the mid-19th century to 2003. Our main focus in on the period of structural decline in these industries after the second world war. Differences in the institutional framework of these regions are exploited to analyze how the broader fiscal constitution sets incentives for governments to either obstruct or to encourage structural change in the private sector. Our main result is that fiscal autonomy of a region subjected to structural change in its private sector is associated with a relatively faster decline of employment in the sectors affected. Contrary to the political lore, fiscal transfers are not used to speed up the destruction of old sectors, but rather to stabilize incomes. (PDF)

Entrepreneurship is a fundamental driver of economic evolution. It is also a distinctly spatially uneven process, and thus an important explanation of the uneven economic development of regions and nations. Not surprisingly, entrepreneurship is a key element of evolutionary economics (Schumpeter 1934; Witt 1998; Grebel et al. 2003; Metcalfe 2004; Grebel 2007) and has been recognized as an important element in explaining (regional) economic development (Acs and Armington 2004; Audretsch et al. 2006; Fritsch 2008). This means that the explanation of regional variations in entrepreneurship has also become an important issue. Even more so because there are pronounced differences within and between nations in rates of entrepreneurship and in their determinants (Bosma and Schutjens 2008), and these differences tend to be persistent over time, reflecting path dependence in industry structure (Brenner and Fornahl 2008), institutions (Casper 2007) and culture (Saxenian 1994) that vary widely across regions and countries, but are relatively inert over time. Introducing entrepreneurship into evolutionary economic geography means that the traditional focus on firms is complemented with a focus on individuals.
This paper is an inquiry into the role of entrepreneurship in evolutionary economic geography. The focus is on how and why entrepreneurship is a distinctly spatially uneven process. We will start with a discussion on the role of entrepreneurship in the theory of economic evolution. Next, we will review the empirical literature on the geography of entrepreneurship. The paper concludes with a discussion of a future agenda for the study of entrepreneurship within evolutionary economic geography.

According to the knowledge-based view of the firm, a firm's workforce is its most important resource, and firms often diversify into activities that allow them to leverage human resources. Human capital also represents a main asset for employees. When switching jobs, individuals are expected to remain in industries that value the skills that they have developed in their previous work. Based on this observation, this article develops theoretical arguments and a statistical method that uses cross-industry labor flows to assess the skill-relatedness between industries. Industries classified in different sectors of the economy sometimes exhibit strong skill-relatedness linkages. Also, industry space, i.e., the resulting network that connects industries with overlapping skill requirements, is highly predictive of diversification moves on the part of firms. Diversification is found to be over 100 times more likely to occur into industries that have ties to a firm's core activity in terms of skills than into industries that do not. This effect of skill-relatedness eclipses the effect of other types of relatedness, such as value chain linkages and classification-based relatedness.

We use a panel vector autoregressions model to examine the coevolution of changes in happiness and changes in income, health, marital status as well as employment status for the British Household Panel Survey (BHPS) data set. This technique allows us to simultaneously analyze the impact of the aforementioned factors on each other. We find that increases in happiness are associated with subsequent increases in income, marriage, employment, and health variables, while increases in the these life-domain variables (except health) tend to be followed by decreases in happiness in subsequent periods, suggesting adaptation dynamics in all domains. These findings are quite robust to different model specifications.

This paper presents the computational model of consumer behaviour. We consider two sources of product specific consumer skill acquisition, termed here as learning how to consume: learning by consuming and consumer socialization. Consumers utilize these two sources in order to derive higher valuations for products they are consuming. In this framework we discuss the behavior of returns to product promotion relative to the changes in product characteristics, such as quality and user-friendliness, as well as in case of varying intensity of consumer socialization. The main finding is that in case of duopoly the dependence of returns to advertising on product quality is not monotonic as it has been claimed by earlier studies. Additional important finding indicating the importance of the models with interacting agents is that returns to advertising exhibit qualitatively different behavior in case of zero intensity of consumer socialization.

Schumpeter's and Hayek's view of market coordination as being not about efficiency, but about endogenous change and never-ending discovery has been increasingly recognized even by the mainstream of economics. Underlying this view is the notion of creative learning agents who bring about novelty. We argue that apart from the challenges it poses for positive theorizing, novelty (be it technological, institutional or commercial) also has a complex normative dimension that standard welfare economics is unsuited to deal with. We show that welfare economics has to be reconstructed on the basis of evolutionary-naturalistic insights into the way human agents bring about, value and respond to novelty-induced change.

We explore the idea of public policy from the perspective of evolutionary thinking. This involves paying attention to concepts like diversity, population, selection, innovation, coevolution, group selection, path-dependence and lock-in. We critically discuss the notion of evolutionary progress. The relevance of evolutionary dynamics is illustrated for policy and political change, technical change, sustainability transitions and regulation of consumer behaviour. A lack of attention for the development of evolutionary policy criteria and goals is identified and alternative choices are critically evaluated. Finally, evolutionary policy advice is compared with policy advice coming from neoclassical economics, public choice theory and theories of resilience and adaptive management. We argue that evolutionary thinking offers a distinct and useful perspective on public policy design and change. (PDF)

This paper proposes to identify the micro-level sources for the dynamic increasing returns occurring at an aggregate level. The paper reverts to a micro model of technological change in-line with the evolutionary literature on industrial dynamics. The data generated through numerical simulations are used to identify the sources of increasing returns as measured by the Kaldor-Verdoorn Law. In this respect we also aim to provide some plausible micro-foundations to this Law. The paper shows that: (i) Dynamic increasing returns appear as an emergent property of the model; (ii) micro-characteristics of technical change, as the amplitude and the frequency of changes, as well as selection mechanisms significantly shape these increasing Returns. (PDF)