A Quantal Response Statistical Equilibrium Model of Induced Technical Change in an Interactive Factor Market: Firm-Level Evidence in the EU Economies

Abstract

This paper studies the pattern of technical change at the firm level by applying and extending the Quantal Response Statistical Equilibrium model (QRSE). The model assumes that a large number of cost minimizing firms decide whether to adopt a new technology based on the potential rate of cost reduction. The firm in the model is assumed to have a limited capacity to process market signals so there is a positive degree of uncertainty in adopting a new technology. The adoption decision by the firm, in turn, makes an impact on the whole market through changes in the factor-price ratio. The equilibrium distribution of the model is a unimodal probability distribution with four parameters, which is qualitatively different from the Walrasian notion of equilibrium in so far as the state of equilibrium is not a single state but a probability distribution of multiple states. This paper applies Bayesian inference to estimate the unknown parameters of the model using the firm-level data of seven advanced OECD countries over eight years and shows that the mentioned equilibrium distribution from the model can satisfactorily recover the observed pattern of technical change.

A Maximum Entropy Model of Bounded Rational Decision-Making with Prior Beliefs and Market Feedback

“…Ömer [22][23][24] applies QRSE to housing markets (which we also use as a validating example), modelling the change in the U.S. house price indices over several distinct periods, and explaining dynamics of growth and dips. Yang [25] applies QRSE to a technological change, modelling the adoption of new technology for various countries over multiple years and successfully recovering the macroeconomic distribution of rates of cost reduction. Wiener [26][27][28] applies QRSE to labour markets, modelling the competition between groups of workers (such as native and foreign-born workers in the U.S.), and capturing the distribution of weekly wages.…”

Growth, Development, and Structural Change at the Firm-Level: The Example of the PR China

“…Instead, and in line with much of the modern literature (Frank, 2009;Bottazzi and Secchi, 2006;Yang, 2018;Yang et al, 2019), we consider a different approach: The attractor distribution to which the result of aggregations of (identical, independent) distributions converges. We remain agnostic with regard to the interpretation of the component distributions being aggregated, though temporal aggregation of shocks or aggregation across jobs, processes, or tasks within a firm are natural component separations that suggest themselves.…”

Labor Market Segmentation and Immigrant Competition: A Quantal Response Statistical Equilibrium Analysis

“…Since the evidence does not support further distinctions among potential micro-level models, parsimony would suggest reporting the constraints directly. In economics, recent work has applied this particular approach to the study of profit rates [ 16 ], wages [ 17 ], the growth rates of labor and capital productivity [ 18 ] and Tobin’s q [ 19 ]. See [ 20 ] for a recent review of maximum entropy applications in economics.…”