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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 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.

Keywords: Firm competition; Laplace distribution; Gibbs sampler; pro t 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
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http://www.economicpolicyresearch.org/econ/2015/NSSR_WP_072015.pdf First version, 2015 (application/pdf)

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