IDEAS home Printed from https://ideas.repec.org/p/epa/cepawp/2015-05.html
   My bibliography  Save this paper

A Statistical Equilibrium Approach to the Distribution of Profit Rates

Author

Abstract

Following the work of Farjoun and Machover (1983) who propose a probabilistic approach to classical political economy, we study the empirical distribution of the rate of profit for previously unexamined firm level data. We detail the theoretical rationale of the principle of maximum entropy which Farjoun and Machover use to predict a stationary profit rate distribution. Then we examine their hypothesis of gamma distributed profit rates for over 24,000 publicly listed North American firms from 1962-2014 and find strong evidence for the organization of the distribution into a double exponential, or Laplace like distribution both at the economy wide and one and two digit SIC industry levels. In addition, we find that the otherwise stationary profit rate distributions exhibit a structural change following the 1980s as they display a surge in the fraction of firms earning negative profits. We offer an alternative justification for the Laplace distribution based on maximum entropy reasoning and show that this distribution can be surprisingly explained by a single constraint on the absolute deviation of profit rates from the mean.

Suggested Citation

  • Ellis Scharfenaker & Gregor Semieniuk, 2015. "A Statistical Equilibrium Approach to the Distribution of Profit Rates," SCEPA working paper series. 2015-05, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    • Handle: RePEc:epa:cepawp:2015-05
    as

    Download full text from publisher

    File URL: https://www.economicpolicyresearch.org/images/docs/research/political_economy/WP_2015-5_Statistical_Equilibrium_Profit_Rates.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Sergey V. Buldyrev & Jakub Growiec & Fabio Pammolli & Massimo Riccaboni & H. Eugene Stanley, 2007. "The Growth of Business Firms: Facts and Theory," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 574-584, 04-05.
    3. Foley Duncan K., 1994. "A Statistical Equilibrium Theory of Markets," Journal of Economic Theory, Elsevier, vol. 62(2), pages 321-345, April.
    4. Scharfenaker, Ellis & dos Santos, Paulo L., 2015. "The distribution and regulation of Tobin’s q," Economics Letters, Elsevier, vol. 137(C), pages 191-194.
    5. Alan G. Isaac, 2014. "The Intergenerational Propagation of Wealth Inequality," Metroeconomica, Wiley Blackwell, vol. 65(4), pages 571-584, November.
    6. Kurz,Heinz D. & Salvadori,Neri, 1997. "Theory of Production," Cambridge Books, Cambridge University Press, number 9780521588676.
    7. Shaikh, Anwar & Papanikolaou, Nikolaos & Wiener, Noe, 2014. "Race, gender and the econophysics of income distribution in the USA," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 54-60.
    8. Giulio Bottazzi & Angelo Secchi, 2003. "Common Properties and Sectoral Specificities in the Dynamics of U.S. Manufacturing Companies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3_4), pages 217-232, December.
    9. Giulio Bottazzi & Angelo Secchi, 2006. "Explaining the distribution of firm growth rates," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 235-256, June.
    10. Adrian Dragulescu & Victor M. Yakovenko, 2000. "Statistical mechanics of money," Papers cond-mat/0001432, arXiv.org, revised Aug 2000.
    11. Mueller,Dennis C., 2009. "Profits in the Long Run," Cambridge Books, Cambridge University Press, number 9780521101592, September.
    12. Alfarano, Simone & Milaković, Mishael & Irle, Albrecht & Kauschke, Jonas, 2012. "A statistical equilibrium model of competitive firms," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 136-149.
    13. Deepankar Basu, 2013. "Replacement versus Historical Cost Profit Rates: What is the Difference? When Does it Matter?," Metroeconomica, Wiley Blackwell, vol. 64(2), pages 293-318, May.
    14. Duncan K. Foley, 1996. "Statistical Equilibrium In A Simple Labor Market," Metroeconomica, Wiley Blackwell, vol. 47(2), pages 125-147, June.
    15. Wagner, Alfred, 1891. "Marshall's Principles of Economics," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 5, pages 319-338.
    16. Saverio M. Fratini & Alessia Naccarato, 2016. "The Gravitation of Market Prices as A Stochastic Process," Metroeconomica, Wiley Blackwell, vol. 67(4), pages 698-716, November.
    17. Markus Schneider, 2015. "Revisiting the thermal and superthermal two-class distribution of incomes," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 88(1), pages 1-10, January.
    18. Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September.
    19. Gijoon Hong & Stavros Peristiani, 2004. "Pre-IPO financial performance and aftermarket survival," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Feb).
    20. Gregor Semieniuk & Ellis Scharfenaker, 2014. "A Bayesian Latent Variable Mixture Model for Filtering Firm Profit Rate," SCEPA working paper series. 2014-1, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    21. Reiner Franke, 2015. "How Fat-Tailed is US Output Growth?," Metroeconomica, Wiley Blackwell, vol. 66(2), pages 213-242, May.
    22. Mishael Milakovic', 2003. "Maximum Entropy Power Laws: An Application to the Tail of Wealth Distributions," LEM Papers Series 2003/01, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ellis Scharfenaker, 2022. "Statistical Equilibrium Methods In Analytical Political Economy," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 276-309, April.
    2. Jangho Yang, 2018. "Information Theoretic Approaches In Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 32(3), pages 940-960, July.
    3. Gregor Semieniuk & Ellis Scharfenaker, 2014. "A Bayesian Latent Variable Mixture Model for Filtering Firm Profit Rate," SCEPA working paper series. 2014-1, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    4. Mundt, Philipp & Alfarano, Simone & Milaković, Mishael, 2020. "Exploiting ergodicity in forecasts of corporate profitability," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    5. Scharfenaker, Ellis & dos Santos, Paulo L., 2015. "The distribution and regulation of Tobin’s q," Economics Letters, Elsevier, vol. 137(C), pages 191-194.
    6. Ellis Scharfenaker, Markus P.A. Schneider, 2019. "Labor Market Segmentation and the Distribution of Income: New Evidence from Internal Census Bureau Data," Working Paper Series, Department of Economics, University of Utah 2019_08, University of Utah, Department of Economics.
    7. Paulo L. dos Santos, 2017. "The Principle of Social Scaling," Complexity, Hindawi, vol. 2017, pages 1-9, December.
    8. Williams, Michael A. & Pinto, Brijesh P. & Park, David, 2015. "Global evidence on the distribution of firm growth rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 432(C), pages 102-107.
    9. Markus P. A. Schneider, 2018. "Revisiting the thermal and superthermal two-class distribution of incomes: A critical perspective," Papers 1804.06341, arXiv.org.
    10. David Vidal-Tomás & Alba Ruiz-Buforn & Omar Blanco-Arroyo & Simone Alfarano, 2022. "A Cross-Sectional Analysis of Growth and Profit Rate Distribution: The Spanish Case," Mathematics, MDPI, vol. 10(6), pages 1-20, March.
    11. Oh, Ilfan, 2019. "Autonomy of profit rate distribution and its dynamics from firm size measures: A statistical equilibrium approach," BERG Working Paper Series 146, Bamberg University, Bamberg Economic Research Group.
    12. Philipp Mundt & Simone Alfarano & Mishael Milakovic, 2016. "Gibrat’s Law Redux: think profitability instead of growth," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 25(4), pages 549-571.
    13. Weber, Jan David & Scharfenaker, Ellis, 2024. "Measures of firm performance and concentration: Stylized facts and a dilemma of data reproduction," Economics Letters, Elsevier, vol. 234(C).
    14. Jangho Yang, 2023. "Information‐theoretic model of induced technical change: Theory and empirics," Metroeconomica, Wiley Blackwell, vol. 74(1), pages 2-39, February.
    15. Lunardi, José T. & Miccichè, Salvatore & Lillo, Fabrizio & Mantegna, Rosario N. & Gallegati, Mauro, 2014. "Do firms share the same functional form of their growth rate distribution? A statistical test," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 140-164.
    16. Arata, Yoshiyuki, 2019. "Firm growth and Laplace distribution: The importance of large jumps," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 63-82.
    17. Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2008. "Are output growth-rate distributions fat-tailed? some evidence from OECD countries," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(5), pages 639-669.
    18. Scharfenaker, Ellis, 2020. "Implications of quantal response statistical equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    19. Wright, Ian, 2009. "Implicit Microfoundations for Macroeconomics," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-27.
    20. Scalas, Enrico & Gallegati, Mauro & Guerci, Eric & Mas, David & Tedeschi, Alessandra, 2006. "Growth and allocation of resources in economics: The agent-based approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 86-90.

    More about this item

    Keywords

    Firm competition; Laplace distribution; Profit rate; Statistical equilibrium;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:epa:cepawp:2015-05. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bridget Fisher (email available below). General contact details of provider: https://edirc.repec.org/data/cenewus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.