EVOLUTION OF NETWORKS AND THE DIFFUSION OF NEW TECHNOLOGY

This paper extends the theoretical framework for exploring the diffusion of new technologies through firms and industries. It is assumed that information about new and profitable technologies is not immediately available to all of the agents in the economy; this information spreads through the economy by means of a network. The pattern of diffusion will depend on the structure of this network. Ideally, firms or agents would balance the costs and benefits of information transfers to establish networks that optimally process information: a profit-maximizing outcome. The problem of determining optimal structures, however, is beyond reasonable computational limitations in many situations of interest. Furthermore, the decision to establish information links is often made by individual agents seeking to optimize their own payoffs; externalities in information processing may create differences between individual and group payoffs. The proposed alternative to the profit-maximizing outcome is that observed structures will be the result of a gradual co-evolutionary process. The focus of this paper is to identify how these evolutionary outcomes compare with optimal solutions.