Demand-Driven Innovation and Spatial Competition Over Time Under Heavy-Tailed Signals

18 Pages Posted: 8 Aug 2005

See all articles by Rustam Ibragimov

Rustam Ibragimov

Harvard University - Department of Economics

Date Written: August 2005

Abstract

We study robustness of the model of demand driven innovation and spatial competition over time with log-concavely distributed signals in Jovanovic and Rob (1987) to heavy-tailedness assumptions. We demonstrate that implications of the model remain valid for not extremely heavy-tailed distributions of consumers' signals. However, its properties are reversed in the case of signals with extremely thick-tailed distributions if the firms employ the sample mean of the signals to estimate the ideal product. We further show that conclusions of the model continue to hold under the only assumption of symmetry of signals if a more robust estimator of the ideal product, the sample median, is chosen as the product design.

Keywords: Robustness, heavy-tailed distributions, demand-driven innovation, spatial competition, firm growth, Gibrat's law, signals, investment, information, sample mean, sample median, majorization

JEL Classification: D92, D83, C62

Suggested Citation

Ibragimov, Rustam, Demand-Driven Innovation and Spatial Competition Over Time Under Heavy-Tailed Signals (August 2005). Harvard Institute of Economic Research Discussion Paper No. 2087, Available at SSRN: https://ssrn.com/abstract=774964 or http://dx.doi.org/10.2139/ssrn.774964

Rustam Ibragimov (Contact Author)

Harvard University - Department of Economics ( email )

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