Maximum Entropy Estimation of Statistical Equilibrium in Economic Models

Ellis ScharfenakerDuncan Foley
Written By SCEPA

WORKING PAPER

DOWNLOAD PDF

(625 KB)

In this paper we examine the class of models defined by a joint distribution of discrete individual actions and an outcome variable so that the joint distribution is underdetermined.

We derive a general maximum entropy based method to infer the underdetermined joint distribution in this class of models, which we refer to as Quantal Response Statistical Equilibrium (QRSE) models. We apply this method to the classical Smithian theory of competition where firms’ profit rates are observed but the entry and exit decisions that determine the distribution of profit rates is unobserved.

SCEPA
Previous

Growth, Income Distribution, and the ‘Entrepreneurial State’
Next

Labor Market Discrimination: A Bleak Outlook for Older Women