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

• Main Author: Jangho Yang
• Format: Article
• Language: English
• Published: MDPI AG 2018-02-01
• Series: Entropy
• Subjects: induced technical change; statistical equilibrium; bounded rationality; cost minimizing behavior; quantal response; factor price
• Online Access: http://www.mdpi.com/1099-4300/20/3/156

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.