International Handbook on the Economics of Integration, Volume II
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International Handbook on the Economics of Integration, Volume II

Competition, Spatial Location of Economic Activity and Financial Issues

Edited by Miroslav N. Jovanović

With this Handbook, Miroslav Jovanović has provided readers with both an excellent stand-alone original reference book as well as an integral part of a comprehensive three-volume set. This introduction into a rich and expanding academic and practical world of international economic integration also provides a theoretical and analytical framework to the reader, presenting select analytical studies and encouraging further research.
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Chapter 5: Theoretical Models of Heterogeneity, Growth and Competitiveness: Insights from the Mainstream and Evolutionary Economics Paradigms

Fulvio Castellacci


Fulvio Castellacci 1 INTRODUCTION The introduction of heterogeneity in economic models represents an exciting new development that has recently attracted increasing attention in the fields of growth theory, international economics and industrial organisation. This recent wave of models describe, in a nutshell, an economic environment where heterogeneous agents (firms) compete with one another and where the competition and market selection process drives the process of creative destruction and aggregate growth. This recent analytical development is not only relevant because it explains a host of empirical stylised facts on firm heterogeneity and industry dynamics, but also for the profound interest it has from a theoretical point of view. By explicitly introducing microlevel heterogeneity, these recent models go beyond the neoclassical standard assumption of a representative agent and increase substantially the realism of the economic description. The original impulse to the development of this type of model can be traced back to Nelson and Winter’s (1982) evolutionary economics theory. Their seminal work formulated a model that was explicitly based on a dynamic process of interaction between heterogeneous agents, market competition and selection, technological innovation and aggregate growth. This led to a series of later refinements and extensions of this type of evolutionary economics model (Lipsey et al., 2005; Verspagen, 2005). At the same time as this evolutionary strand of modelling research was developing, the heterogeneity issue also attracted substantial attention within the economics mainstream. Different branches of growth research saw the flourishing of models that introduced firm heterogeneity, competition and selection features...

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