Firm Behavior

Weber - QRSE.pdf

Asymmetric Perception of Firm Entry and Exit

Many models of firm behavior in economics fail to conceptualize the correct process of firms' action or to reproduce the empirical macroeconomic outcome. The reason is that the behavior of rms in the economy does not follow a strict model that a representative agent can conceptualize. The Quantal Response Statistical Equilibrium framework has been developed by Ellis Scharfenaker and Duncan Foley to bridge the methodological gap between unobservable, individual behavior and the observed distribution of parameter at the macro level. The model is based on the entropy maximizing principle to ensure the largest degree of freedom. It uses the observed macroeconomic distribution of all rm's return rate as a constraint to the model. The macroeconomic outcome constrains the individual probabilistic behavior of firms. The decision-making process of firms does differ for entry and exit decisions. The separate threshold and behavioral temperature cannot be captured in most models. I provide a preliminary overview of how a Quantal Response Statistical Equilibrium framework could work if the entry and exit decisions are asymmetric in their threshold and behavioral temperature.

Compared to the baseline Quantal Response Statistical Equilibrium framework or other classical competition models, the asymmetric Quantal Response Statistical Equilibrium model is more capable of capturing the data. The asymmetric Quantal Response Statistical Equilibrium model allows for a detailed analysis of how the entry and exit behavior is induenced and changed over time. The addition of asymmetric behavior creates a model closer to the economic reality. The model allows for seperate thresholds for firm entry and exit decisions of rms into a market. These separate thresholds are accompanied by different behavioral temperatures. The behavioral temperatures capture the reactivity of firms to divergence from the threshold. As the model captures the data-generating process of individual rms and the observed macroeconomic outcome, it provides a powerful tool for modeling, understanding, and evaluating firm behavior.