A Simple Locally Interactive Model of Ergodic and Nonergodic Growth

Abstract In this paper we provide a simple locally interactive dynamic model of technology choice and output production. We assume a Cobb-Douglas type production function for two available technologies. The returns to technology 0 are not affected by local spillovers. Technology 1 is more costly, as there is an overhead cost, but it has a higher marginal productivity with respect to net capital. The superiority of technology 1 positively and monotonically depends on the fraction of neighbours using it. We study the aggregate process of technology choices in a model with countably many firms and repeated choices. The model explains: (i) persistent aggregate fluctuations in the presence of only idiosyncratic shocks, (ii) cross sectional heterogeneity along the dynamics and (iii) the possibility of multiple equilibria. The main contribution of the paper over the existing literature is that the model explains the endogeneous formation of large areas, homogeneous in terms of technology choice and output level, that look stationary along the dynamics.