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How much can firms know?

Author

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  • Bridget Rosewell
  • Paul Ormerod

Abstract

There are two key stylised facts about the extinction patterns of firms. First, the probability of extinction is highest at the start of the firm"s existence, but soon becomes more or less invariant to the age of the firm. Second, the relationship between the size and frequency of firm extinctions is closely approximated by a power law. An agent based model of firm evolution and extinction has been developed which has properties which conform closely to the stylised facts. We examine the effects of allowing firms different amounts of knowledge about the effects of strategy in the context of this agent-based evolutionary model. There are very considerable returns in the model to acquiring knowledge. As both the amount of knowledge available to firms increases and as the number of firms capable of acquiring such knowledge rises, the lifespan of agents approaches the full information paradigm in which agents live for ever. However, even with relatively low levels of knowledge and numbers of agents capable of acquiring it, the model ceases to have properties which are compatible with the two key stylised facts on firm extinctions. The clear implication is that firms have very limited capacities to acquire knowledge about the true impact of their strategies.

Suggested Citation

  • Bridget Rosewell & Paul Ormerod, 2004. "How much can firms know?," Computing in Economics and Finance 2004 44, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:44
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    File URL: http://repec.org/sce2004/up.28483.1076498136.pdf
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    References listed on IDEAS

    as
    1. Guilmi, Corrado Di & Gallegati, Mauro & Ormerod, Paul, 2004. "Scaling invariant distributions of firms’ exit in OECD countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 334(1), pages 267-273.
    2. L. A. N. Amaral & S. V. Buldyrev & S. Havlin & H. Leschhorn & P. Maass & M. A. Salinger & H. E. Stanley & M. H. R. Stanley, 1997. "Scaling behavior in economics: I. Empirical results for company growth," Papers cond-mat/9702082, arXiv.org.
    3. Cook, William & Ormerod, Paul, 2003. "Power law distribution of the frequency of demises of US firms," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 207-212.
    4. Vickers, John, 1995. "Concepts of Competition," Oxford Economic Papers, Oxford University Press, vol. 47(1), pages 1-23, January.
    5. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
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    More about this item

    Keywords

    agent based evolutionary model; heterogenous agents; learning;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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