Technological substitution effects with ISIS, a spatial, inter-sectoral nonlinear dynamic model

Abstract

At the microscopic level, an agent (household or firm) will order the necessary inputs according to its current production and equipment technology in order to execute a chosen production and investment, and this generates a flow of orders which will be dispatched to available suppliers according to their relative economic and spatial attractiveness. These new orders increase each agent’s backlog of orders, which are subsequently decreased by its own production, itself monitored by the backlog of orders. The production capacity, a multiple of the capital stock, is adjusted through investments according to the backlog of orders and the average sectoral profit. The price is influenced by the ratio of new orders to the capacity of production and the production technology is slowly modified according to changing relative costs of inputs and innovations in the sector. Migrations of persons are accounted for, but not migrations of capital. These microscopic behaviours and interactions have only been validated at the macroscopic level for Germany (′75-′89) with an error range of about 10% around observations. We then carried out a sensitivity analysis for the parameter controlling price elasticity of technological change concerning the labour factor. This enabled us to assess threshold levels where positive microscopic reactions from producers and negative microscopic reactions from consumers due to macroscopic losses of purchasing power start to compensate each other in response to decreases of labour intensity.