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A Quantal Response Model of Firm Competition

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  • Ellis Scharfenaker

    () (Department of Economics, New School for Social Research)

Abstract

The distribution of pro t rates in the U.S. economy for 21,714 rms from 1962 - 2012 appears to be highly organized in a Laplace-like distribution. Pos- itive pro t rate deviations from the mode appear to be remarkably stationary over time displaying little parametric changes while negative pro t rate devi- ations introduce an asymmetry into the distribution that appears to uctuate over time. In this paper I propose a model of \classically" competitive rms facing informational entropy constraints in their decisions to potentially enter or exit markets based on pro t rate di erentials. The result is a three parameter logit quantal response distribution for rm entry and exit decisions. Bayesian methods are used for inference into the the distribution of entry and exit deci- sions conditional on pro t rate deviations and rm level data from Compustat is used to test these predictions. The model parameters show a uctuating asymmetry in rm exit decisions, an increase in dispersion of negative pro t rate di erentials, and a falling general rate of pro t.

Suggested Citation

  • Ellis Scharfenaker, 2015. "A Quantal Response Model of Firm Competition," Working Papers 1507, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1507
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    File URL: http://www.economicpolicyresearch.org/econ/2015/NSSR_WP_072015.pdf
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    References listed on IDEAS

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    Cited by:

    1. Williams, Michael A. & Baek, Grace & Park, Leslie Y. & Zhao, Wei, 2016. "Global evidence on the distribution of economic profit rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 356-363.

    More about this item

    Keywords

    Firm competition; Laplace distribution; Gibbs sampler; pro t rate; statistical equilibrium; rational inattention; information theory; quantal response;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D20 - Microeconomics - - Production and Organizations - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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