Impact of environmental dynamics on economic evolution: A stylized agent-based policy analysis

Abstract

The general problem 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 these 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 frequently the environment changes. Numerical analysis shows how the socially optimal level of diversity increases with the frequency and speed of environmental change. When there is uncertainty about the specific type of environmental dynamics-whether for lack of data or because it is not constant-the socially optimal level of diversity increases with the degree of risk aversion of the policy maker or the society. © 2012 Elsevier Inc.