A statistical equilibrium model of competitive firms

A statistichal equilibrium perspective on corporate profitability

“…From an economic point of view, Alfarano et al (2012), argue that the considerable stability of the profit rate should stem from the notion of classical competition that gives rise to a negative feedback mechanism, whereby capital seeks out sectors or industries where the profit rate is higher than the economy-wide average, typically attracting labor, raising output, and reducing prices and profit rates in the process. This in turn provides an incentive for capital to leave the sector again, leading to higher prices and profit rates for firms that remain in the industry.…”

“…These properties of corporate profit rates establish a major difference to growth rates, and would seem to represent a more immediate way to study the competitive behavior of corporations, at the very least from a statistical point of view. Inspired by the empirical densities of cross-sectional profit rates, Alfarano et al (2012) have recently introduced a diffusion process with a stationary Laplace distribution. We argue here that the process is not only consistent with the observed cross-sectional distribution, but also with the time series properties of surviving corporations, including their autocorrelation structures.…”

“…To the best of our knowledge, the Laplace diffusion introduced below is the only model for the dynamics of firm profitability that is consistent with both the cross-sectional distribution and the individual time series properties of profit rates. Alfarano et al (2012) propose the stochastic differential equation…”

“…So instead of staying on Gibrat's well-trodden path of random growth rates that are drawn from a common distribution, we propose a dynamic law for the evolution of profit rates that turns out to be a diffusion process consistent with the cross-sectional distribution of profit rates (see Alfarano et al, 2012, for details). The process incorporates the principle that competition tends to equalize profit rates, a principle that provides the economic intuition for the very existence of a common distribution of profit rates across firms, and is absent in the case of growth rates.…”

“…Profit rates have nevertheless been studied in the context of the so-called persistence of profits literature that starts with Mueller (1977) (see, e.g., Cuaresma and Gschwandtner, 2006, for a more recent take on the subject), and more recently also in the context of a statistical equilibrium framework Alfarano and Milaković (2008) and Alfarano et al (2012Alfarano et al ( , 2013) that will guide our present investigation. 23…”