Back to the future: economic rationality and maximum entropy prediction
An information-theoretic thought experiment is developed to clarify why the maximum entropy methodology is appropriate for predicting the equilibrium state of economic systems. As a first step, object allocation problems, modeled as knapsack problems, are shown to be equivalent to congestion games under weak assumptions. This proves the existence of finite improvement paths linking initial conditions and Nash equilibria. The existence of these improvement paths is precisely what enables the use of maximum entropy to make predictions concerning the equilibrium state. Finally an illustration of this predictive power is provided through an application to the Schelling model of segregation.
|Date of creation:||Jan 2012|
|Date of revision:|
|Contact details of provider:|| Postal: School of Economics, University of Kent, Canterbury, Kent, CT2 7NP|
Phone: +44 (0)1227 827497
Web page: http://www.kent.ac.uk/economics/
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harris, Milton & Raviv, Artur, 1981. "Allocation Mechanisms and the Design of Auctions," Econometrica, Econometric Society, vol. 49(6), pages 1477-99, November.
- Alfarano, Simone & Milakovic, Mishael, 2008.
"Does classical competition explain the statistical features of firm growth?,"
Elsevier, vol. 101(3), pages 272-274, December.
- Alfarano, Simone & Milaković, Mishael, 2008. "Does Classical Competition Explain the Statistical Features of Firm Growth?," Economics Working Papers 2008,03, Christian-Albrechts-University of Kiel, Department of Economics.
- Alexis Toda, 2010. "Existence of a statistical equilibrium for an economy with endogenous offer sets," Economic Theory, Springer, vol. 45(3), pages 379-415, December.
- Tutino, Antonella, 2011.
"Rationally inattentive macroeconomic wedges,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 35(3), pages 344-362, March.
- Mishael Milakovic & Carolina Castaldi, 2004.
"Turnover Activity in Wealth Portfolios,"
Computing in Economics and Finance 2004
120, Society for Computational Economics.
- Gallegati, Mauro & Keen, Steve & Lux, Thomas & Ormerod, Paul, 2006. "Worrying trends in econophysics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 1-6.
- Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
- Chakrabarti, Anindya S. & Chakrabarti, Bikas K., 2009. "Microeconomics of the ideal gas like market models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(19), pages 4151-4158.
- Hurwicz, Leonid, 1973. "The Design of Mechanisms for Resource Allocation," American Economic Review, American Economic Association, vol. 63(2), pages 1-30, May.
- Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
- Sylvain Barde, 2012. "Of Ants and Voters. Maximum Entropy Prediction of Agent-Based Models with Recruitment," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 147-175.
- Schelling, Thomas C, 1969. "Models of Segregation," American Economic Review, American Economic Association, vol. 59(2), pages 488-93, May.
- Monderer, Dov & Shapley, Lloyd S., 1996. "Potential Games," Games and Economic Behavior, Elsevier, vol. 14(1), pages 124-143, May.
- Mhand Hifi & Slim Sadfi & Abdelkader Sbihi, 2004. "An exact algorithm for the multiple-choice multidimensional knapsack problem," Cahiers de la Maison des Sciences Economiques b04024, Université Panthéon-Sorbonne (Paris 1).
When requesting a correction, please mention this item's handle: RePEc:ukc:ukcedp:1202. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tracey Girling)
If references are entirely missing, you can add them using this form.