Impact of environmental dynamics on economic evolution: A stylized agent-based policy analysis

The general problem of how environmental dynamics affect
the behavioral interaction in an evolutionary economy is considered. To this end,
a basic model of a dynamic multi-sector economy is developed where the evolution
of investment strategies depends on the diversity of these strategies, social
connectivity, and relative contribution of sector specific investments to
production. Four types of environmental dynamics are examined that differ in
how gradual and how frequently the environment changes. Numerical analysis
shows how the socially optimal level of diversity increases with the
frequency and speed of environmental change. When there is uncertainty
about the specific type of environmental dynamics---whether for lack
of data or because it is not constant---the socially optimal level of diversity
increases with the degree of risk aversion of the policy maker or the society.