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Maximum Entropy Estimation of Statistical Equilibrium in Economic Models

March 10, 2017

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.

Authors: Ellis Scharfenaker, Duncan Foley
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