A Quantal Response Model of Firm Competition

Ellis Scharfenaker

No 1507, Working Papers from New School for Social Research, Department of Economics

Abstract: The distribution of profit rates in the U.S. economy for 21,714 firms from 1962 - 2012 appears to be highly organized in a Laplace-like distribution. Positive profit rate deviations from the mode appear to be remarkably stationary over time displaying little parametric changes while negative profit rate deviations introduce an asymmetry into the distribution that appears to fluctuate over time. In this paper I propose a model of ``classically" competitive firms facing informational entropy constraints in their decisions to potentially enter or exit markets based on profit rate differentials. The result is a three parameter logit quantal response distribution for firm entry and exit decisions. Bayesian methods are used for inference into the the distribution of entry and exit decisions conditional on profit rate deviations and firm level data from Compustat is used to test these predictions. The model parameters show a fluctuating asymmetry in firm exit decisions, an increase in dispersion of negative profit rate differentials, and a falling general rate of profit.

Keywords: Firm competition; Laplace distribution; Gibbs sampler; profit rate; statistical equilibrium; rational inattention; information theory; quantal response (search for similar items in EconPapers)
JEL-codes: C10 C15 D20 D22 E10 L11 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-03
New Economics Papers: this item is included in nep-com, nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:1507

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