A statistical equilibrium model of competitive firms
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Other documents of the author: Alfarano, Simone; Milakovic, Mishael; Irle, Albrecht; Kauschke, Jonas
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comunitat-uji-handle2:10234/8643
comunitat-uji-handle3:10234/8644
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Title
A statistical equilibrium model of competitive firmsDate
2012-01Publisher
ElsevierISSN
0165-1889Bibliographic citation
Journal of Economic Dynamics and Control Volume 36, Issue 1, January 2012Type
info:eu-repo/semantics/articlePublisher version
http://www.sciencedirect.com/science/article/pii/S0165188911001424Version
info:eu-repo/semantics/acceptedVersionSubject
Abstract
We find that the empirical density of firm profit rates, measured as returns on assets, is markedly non-Gaussian and reasonably well described by an exponential power (or Subbotin) distribution. We start from a ... [+]
We find that the empirical density of firm profit rates, measured as returns on assets, is markedly non-Gaussian and reasonably well described by an exponential power (or Subbotin) distribution. We start from a statistical equilibrium model that leads to a stationary Subbotin density in the presence of complex interactions among competitive heterogeneous firms. To investigate the dynamics of firm profitability, we construct a diffusion process that has the Subbotin distribution as its stationary probability density. This leads to a phenomenologically inspired interpretation of variations in the shape parameter of the Subbotin distribution, which essentially measures the competitive pressure in and across industries. Our findings have profound implications both for the previous literature on the ‘persistence of profits’ as well as for understanding competition as a dynamic process. Our main formal finding is that firms' idiosyncratic efforts and the tendency for competition to equalize profit rates are two sides of the same coin, and that a ratio of these two effects ultimately determines the dispersion of the equilibrium distribution. [-]
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Copyright © 2011 Elsevier B.V. All rights reserved. This is the author’s version of a work that was accepted for publication in Journal of Economic Dynamics and Control. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Dynamics and Control, VOL 36, ISSUE 1, (2012) DOI http://dx.doi.org/10.1016/j.jedc.2011.07.002
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