Breaking open the black box of the production function: an agent-based model accounting for time in production processes

TL;DR

This paper introduces an agent-based model that incorporates time into the analysis of production processes, revealing how heterogeneous firms adapt and fail over time, with implications for industrial policy.

Contribution

It develops a detailed agent-based model that explicitly accounts for production time, heterogeneity, and firm strategies, advancing understanding of production dynamics and policy impacts.

Findings

Heterogeneous production durations affect firm behavior.

Adaptive strategies influence production success and failures.

Model provides insights into industrial policy effects.

Abstract

Traditional notions of production function do not consider the time dimension, appearing thus timeless and instantaneous. We propose an agent-based model accounting for the whole production side of the economy to unfold the production process from its very beginning, when firms receive production orders, to the delivery of the products to the market. In the model we analyze with a high-degree of details how heterogeneous firms, having labor and capital as productive factors, behave along all the realization processes of their outputs. The main focus covers: i) the heterogeneous duration of firms' production processes, ii) the adaptive strategies they implement to adjust their choices, and iii) the possible failures which may occur due to the duration of the production. Our agent-based model is a controlled experiment: we use a virtual central planner mechanism, which acts as the demand side of the economy, to observe which firm individual behaviors and aggregate macroeconomic outcomes emerge as a reply to its different behaviors in a ceteris paribus environment. Our applied goal, then, is to discuss the role of industrial policy by modeling production processes in detail.