Dynamic efficiency is a term in economics, which refers to an economy that appropriately balances short run concerns (static efficiency) with concerns in the long run (focusing on encouraging research and development).[1] Through dynamic efficiency, such an economy is able to further improve efficiency over time. Investments in education, research and innovation are important in this process.
Dynamic efficiency also refers to the ability to adapt quickly and at low cost to changed economic conditions and thereby maintain output and productivity performance despite economic 'shocks'. Dynamic efficiency is pursued through microeconomic reform and increased competition, which provide incentives for businesses to innovate and adapt.
The Solow model and the Ramsey-Cass-Koopmans model do not have dynamic efficiency problems, but the Diamond Growth model is dynamically inefficient because of the overlapping generation setup; there is an allocation point which is better than the competitive equilibrium allocation point.