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Quantal Response Statistical Equilibrium in Economic Interactions: Theory and Estimation

1
Department of Economics, University of Missouri-Kansas City, 5120 Rockhill Road, Kansas City, MO 64110, USA
2
Department of Economics, The New School for Social Research, 79 Fifth Avenue, New York, NY 10003, USA
*
Author to whom correspondence should be addressed.
Entropy 2017, 19(9), 444; https://doi.org/10.3390/e19090444
Received: 26 May 2017 / Revised: 10 August 2017 / Accepted: 23 August 2017 / Published: 25 August 2017
(This article belongs to the Special Issue Entropic Applications in Economics and Finance)
Social science addresses systems in which the individual actions of participants interacting in complex, non-additive ways through institutional structures determine social outcomes. In many cases, the institutions incorporate enough negative feedback to stabilize the resulting outcome as an equilibrium. We study a particular type of such equilibria, quantal response statistical equilibrium (QRSE) using the tools of constrained maximum entropy modeling developed by E. T. Jaynes. We use Adam Smith’s theory of profit rate maximization through competition of freely mobile capitals as an example. Even in many cases where key model variables are unobserved, it is possible to infer the parameters characterizing the equilibrium through Bayesian methods. We apply this method to the Smithian theory of competition using data where firms’ profit rates are observed but the entry and exit decisions that determine the distribution of profit rates is unobserved, and confirm Smith’s prediction of the emergence of an average rate of profit, along with a characterization of equilibrium statistical fluctuations of individual rates of profit. View Full-Text
Keywords: quantal response; maximum entropy; information-theoretic quantitative methods; incomplete information; link function; profit rate distribution quantal response; maximum entropy; information-theoretic quantitative methods; incomplete information; link function; profit rate distribution
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Scharfenaker, E.; Foley, D.K. Quantal Response Statistical Equilibrium in Economic Interactions: Theory and Estimation. Entropy 2017, 19, 444.

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