CFDP 1786

Cost Innovation: Schumpeter and Equilibrium. Part 1. Robinson Crusoe


Publication Date: March 2011

Revision Date: August 2011

Pages: 30


Modifying a parallel dynamic programming approach to a simple deterministic economy, we consider the effect of an innovation in the means of production. The success of the innovation is assumed to depend on the availability of financing, locus of financial control, the amount of resources invested, and on a random event. The relationship between money and physical assets is critical. In this first part stress is laid on the innovation behavior of Robinson Crusoe in a premonetary economy, then on his actions in a monetary economy in partial equilibrium. Part 2 considers the closed monetary economy with several differentiated agents.


Cost innovation, Schumpeter, Circular flow, Strategic market games

JEL Classification Codes:  C73, D24, G32