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Innovation overhangs

Examples:

  • costs of traded nox credits were much lower than modelled
  • bp's cost of cleaning up was much less than projected (and also dupont's)
  • cost of changing from cfc's was lower (i think)
  • cost of cafe compliance was lower
  • magnitude of california energy efficiency improvements in 2001 greater than projected

Implications:

  • we systematically overestimate the costs of environmental policies by underestimating the ability of the economy to innovate
  • this may apply to other regulations as well
  • 'innovation friendly' regulations will be outcomes-based, liked traded credits, rather than process-based
  • policy can feed the overhang, with r&d, and speed harvest of the overhang directly, with government procurement, as well as build private harvesting through regulation or tradable credits

Model elements:

  • innovations made = F(prospective innovations, capital, management attention)
  • prospective innovations grow exponentially (combinatorially), through combination of previous innovations
    • rate is also faster due to globalization of markets, expansion of population of innovators, and moore's law ITC improvements
    • so the overhang should have been getting larger and still getting larger with time
  • capital availability has a proxy in interest rates
  • managerial attention to harvest innovations (analyzing alternatives, making decisions, following through) is essentially proportional to the economy.  it can't be arbitrarily extended.  the managerial capactiy chooses among innovations and other ways to spend time (attending to competitors, planning non-innovative expansion, etc).  arguably each alternative harvests some innovation potential

There may be some relationship to chaos-based models of other economic avalanche effects.

= = =

Links to L. Summers:   First, Second, Third

 
http://ustreasury.mondosearch.com/cgi-bin/MsmGo.exe?grab_id=75920625&;EXTRA_ARG=&host_id=1&page_id=682&query=summers+avalanche
http://ustreasury.mondosearch.com/cgi-bin/MsmGo.exe?grab_id=75920625&;EXTRA_ARG=&host_id=1&page_id=848&query=summers+avalanche
 
 
 

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Last update: 11/25/2005; 12:18:11 AM.
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