Technological Innovation, Financial Fragility and Complex Dynamics

Technological Innovation, Financial Fragility and Complex Dynamics In this paper we suggest a scaling approach to business cycles. We develop a heterogeneous interacting agents (HIAs) model that replicates well known industrial dynamics stylized facts, as the power law distribution of firms’ size and the Laplace distribution of firms’ growth rates. In particular, the power law is a persistent but not time invariant feature of firms distribution. In order to account for the shifting behavior of the firms size power law distribution along business cycles, we propose a simple economic mechanism based on the interplay among R&D investment, technological innovation, wage dynamics and financial factors. Agent-based simulations show that power law shifts are a consequence of changes in firms’ capital accumulation behavior due to technological progress and a wage – firm size relationship. We also find that the model simulation replicates important growth type stylized facts and a dynamic relationship between workers’ wages and firms’ profits. JEL classification: C63, E32, O32