A Herding-Based Model of Technological Transfer and Economic Convergence: Evidence from Central and Eastern Europe

TL;DR

This paper introduces a herding-based technological transfer model to explain economic convergence, emphasizing peer effects and adoption dynamics in Central and Eastern European countries.

Contribution

It extends the neoclassical growth model by explicitly modeling technological diffusion through herding interactions, providing analytical solutions and empirical evaluation.

Findings

Model captures nonlinear convergence toward a technological frontier.

Analytical solution links diffusion parameters to productivity growth.

Empirical analysis supports the herding-based diffusion mechanism.

Abstract

The long-run convergence of developing economies toward advanced countries exhibits robust empirical regularities, yet the mechanisms underlying technological diffusion remain insufficiently specified in standard growth models. In this paper, we extend the neoclassical framework by introducing a micro-founded mechanism of technological transfer as a driver of total factor productivity. Rather than treating technological progress as exogenous or purely innovation-driven, we model productivity growth as a process of adopting existing technologies from the global frontier. The diffusion process is described using a herding-type interaction mechanism, in which agents transition from non-adopters to adopters under the combined influence of individual incentives and peer effects. This approach yields a tractable aggregate representation of TFP dynamics characterized by nonlinear convergence toward a moving technological frontier. We derive an explicit analytical solution and provide an interpretation of model parameters in terms of initial productivity, convergence limits, and diffusion speed. The model is evaluated using OECD productivity data for Central and Eastern European economies.