nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒08‒13
25 papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. The Effects of Disclosure Regulation of an Innovative Firm By Jos Jansen
  2. The Poverty of Growth with Interdependent Utility Functions By John Komlos; Peter Salamon
  3. Silent Interests and All-Pay Auctions By Kai A. Konrad
  4. Virtual Capacity and Competition By Christian Schultz
  5. Bid Rigging – An Analysis of Corruption in Auctions By Yvan Lengwiler; Elmar G. Wolfstetter
  6. Sabotaging Potential Rivals By J. Atsu Amegashie; Marco Runkel
  7. Efficient Competitive Equilibria with Adverse Selection By Alberto Bisin; Piero Gottardi
  8. CEO-Firm Match and Principal-Agent Problem By Li, Fei; Ueda, Masako
  9. Contests with Ties By Cohen, Daniel; Sela, Aner
  10. Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality By Pastine, Tuvana; Pastine, Ivan
  11. Competition, Consumer Welfare, and the Social Cost of Monopoly By Yoon-Ho Alex Lee; Donald J. Brown
  12. Demand Estimation for Italian Newspapers: The Impact of Weekly Supplements By Elena Argentesi
  13. Estimating market power in a two-sided market: the case of newspapers By Elena Argentesi; Lapo Filistrucchi
  14. Individual Irrationality and Aggregate Outcomes By Ernst Fehr; Jean-Robert Tyran
  15. How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data By Florian Zettelmeyer; Fiona Scott Morton; Jorge Silva-Risso
  16. Digital Rights Management and the Pricing of Digital Products By Yooki Park; Suzanne Scotchmer
  17. Product Market Competition and Economic Performance in Korea By Yongchun Baek; Randall Jones; Michael Wise
  18. Product Market Competition and Economic Performance in Finland By Jens Høj; Michael Wise
  19. Poisson Price Dispersion By Halevy, Yoram; Milchtaich, Igal
  20. Two Types of Collusion in a Model of Hierarchical Agency By Mehmet Bac; Serkan Kucuksenel
  21. The economics of Information Technologies Standards & By Eric Thivant; Laid Bouzidi
  22. R&D and Patenting Activity and the Propensity to Acquire in High Technology Industries By Panayotis Dessyllas; Alan Hughes
  23. The economic theory of quasi-exclusive territory By Daisuke Nikae; Takeshi Ikeda
  24. Socially Beneficial Mergers: A New Class of Concentration Indices By Nejat Anbarci; Brett Katzman
  25. Statistical Entropy in General Equilibrium Theory By Panagis Liossatos

  1. By: Jos Jansen
    Abstract: A firm actively manages its rival’s beliefs by disclosing and concealing information on the size of its process innovation. The firm’s disclosure strategy results from the trade-off between two effects on product market incentives. First, the firm’s competitor learns that the firm is efficient, which discourages the competitor. Second, the competitor becomes more efficient himself, since he can expropriate part of the disclosed knowledge, which encourages him. I characterize the equilibrium disclosure strategies for any knowledge spillover in a simple Cournot duopoly model, and illustrate the results graphically. Moreover, I compare the strategic disclosure equilibria with equilibria under non-strategic disclosure.
    Keywords: process innovation, Cournot competition, strategic substitutes, information disclosure, knowledge spillovers
    JEL: D82 L23 O31
    Date: 2005
  2. By: John Komlos; Peter Salamon
    Abstract: We argue that with interdependent utility functions growth can lead to a decline in total welfare of a society if the gains from growth are sufficiently unequally distributed in the presence of negative externalities, i.e., envy.
    Keywords: interdependent utility functions, growth, inequality
    JEL: D62 D63 D64 O00
    Date: 2005
  3. By: Kai A. Konrad
    Abstract: If firms compete in all-pay auctions with complete information, silent shareholdings introduce asymmetric externalities into the all-pay auction framework. If the strongest firm owns a large share in the second strongest firm, this may make the strongest firm abstain from bidding. As a consequence, equilibrium profits of both firms may increase, but the prize may be allocated less efficiently. The reverse ownership structure is also likely to increase the profits of the firms involved in the ownership relationship but without these negative efficiency effects.
    Keywords: all-pay auctions, externalities, contests, silent minority shareholdings, ownership structure
    JEL: D44 L11 L41
    Date: 2005
  4. By: Christian Schultz
    Abstract: In several European merger cases competition authorities have demanded that the merging firm auctions off virtual capacity. The buyer of virtual capacity receives an option on an amount of output at a pre-specified price, typically equal to marginal cost. This output is sold in the market in competition with the merging firm. The paper compares sale of physical and virtual capacity by the merging firm and shows that virtual capacity leads to a less competitive outcome. The merging firm can build up a reputation for producing little, so that the output price increases in the market, and this increases the auction price on virtual capacity.
    Keywords: virtual capacity, reputation, tacit collusion, antitrust, mergers, competition policy
    JEL: D44 L40 L41
    Date: 2005
  5. By: Yvan Lengwiler; Elmar G. Wolfstetter
    Abstract: In many auctions, the auctioneer is an agent of the seller. This invites corruption. We propose a model of corruption in which the auctioneer orchestrates bid rigging by inviting a bidder to either lower or raise his bid, whichever is more profitable. We characterize equilibrium bidding in first- and second-price auctions, show how corruption distorts the allocation, and why both the auctioneer and bidders may have a vested interest in maintaining corruption. Bid rigging is initiated by the auctioneer after bids have been submitted in order to minimize illegal contact and to realize the maximum gain from corruption.
    Keywords: auctions, procurement, corruption, right of first refusal, numerical methods
    JEL: D44
    Date: 2005
  6. By: J. Atsu Amegashie; Marco Runkel
    Abstract: This paper studies sabotage in a contest with non-identical players. Unlike previous papers, we consider sabotage in an elimination contest and allow contestants to sabotage a potential or future rival. It turns out that for a certain partition of players there is a pure-strategy equilibrium in which only the most able contestant engages in sabotage while less able contestants do not. The most able contestant may therefore prefer a situation where sabotage is allowed to one where sabotage is not allowed. For another partition of players, there is a unique equilibrium in which none of the players invests in sabotage.
    Keywords: all-pay auction, elimination contests, potential rival, sabotage
    JEL: D72 D74
    Date: 2005
  7. By: Alberto Bisin; Piero Gottardi
    Abstract: Do Walrasian markets function orderly in the presence of adverse selection? In particular, is their outcome efficient? This paper addresses these questions in the context of a Rothschild and Stiglitz insurance economy. We identify an externality associated with the presence of adverse selection as a special form of consumption externality. Consequently, we show that while competitive equilibria always exist, they are not typically incentive efficient. However, as markets for pollution rights can internalize environmental externalities, markets for consumption rights can be designed so as to internalize the consumption externality due to adverse selection. With such markets competitive equilibria exist and are always incentive efficient. Moreover, any incentive efficient allocation can be decentralized as a competitive equilibrium.
    JEL: D50 D62 D82 G22
    Date: 2005
  8. By: Li, Fei; Ueda, Masako
    Abstract: We study the implication of the standard principal-agent theory developed by Holmstrom and Milgrom (1987) on the endogenous matching of CEO and firm. We show that a CEO with low disutility of effort, low risk aversion, or both should manage a safer firm in the matching equilibrium, and that a CEO in a safer firm should receive a higher compensation than average. Nevertheless, these predictions are not supported by data; proxies for low disutility such as educational achievement and experience are either not related to firm risks or significantly related but in the direction opposite to that predicted by the theory. CEOs of safer firms are paid less than average, again contrary to the standard principal-agent theory.
    Keywords: Principal-Agent problem; sorting
    JEL: G39
    Date: 2005–07
  9. By: Cohen, Daniel; Sela, Aner
    Abstract: We study all-pay contests in which there is a positive probability of a tied outcome. We analyse both one-stage contests and multi-stage contests with tie-breaks. We demonstrate that in symmetric two-player contests, the designer does not have an incentive to award a prize in a case of a tie. Consequently, in symmetric multi-stage two-player contests, the designer should allow an unlimited number of tie-breaks until a winner is decided.
    Keywords: all-pay auctions; contests
    JEL: D44 D72
    Date: 2005–07
  10. By: Pastine, Tuvana; Pastine, Ivan
    Abstract: This paper studies advertising in vertically differentiated product markets with positive consumption externalities. In markets with consumption externalities, the value of the product to the consumer depends on the purchasing decisions of other consumers. In such markets, we show that firms will engage in advertising competition in order to convince consumers of their popularity only as long as they produce goods of similar quality. The firm with the lower quality product will have a greater incentive to advertise. If it is not the brand to provide the greater consumption externality it will have very low market share due to its low intrinsic quality. Hence, in equilibrium, the lower quality product will often be more popular. This provides an additional explanation for the empirical observation that in some markets high quality is associated with lower levels of advertising.
    Keywords: advertising; consumption externalities; coordination; product quality
    JEL: L13 L15 M37
    Date: 2005–07
  11. By: Yoon-Ho Alex Lee; Donald J. Brown (Cowles Foundation, Yale University)
    Abstract: Conventional deadweight loss measures of the social cost of monopoly ignore, among other things, the social cost of inducing competition and thus cannot accurately capture the loss in social welfare. In this Article, we suggest an alternative method of measuring the social cost of monopoly. Using elements of general equilibrium theory, we propose a social cost metric where the benchmark is the Pareto optimal state of the economy that uses the least amount of resources, consistent with consumers' utility levels in the monopolized state. If the primary goal of antitrust policy is the enhancement of consumer welfare, then the proper benchmark is Pareto optimality, not simply competitive markets. We discuss the implications of our approach for antitrust law as well as how our methodology can be used in practice for allegations of monopoly power given a history of price-demand observations.
    Keywords: Monopoly power, Antitrust economics, Applied general equilibrium
    JEL: D42 D58 D61 L12 L41
    Date: 2005–07
  12. By: Elena Argentesi
    Abstract: This paper looks at a form of non-price competition that has taken place in the Italian newspaper market, whereby weekly supplements are sold with the newspaper at a higher price. I estimate the impact of this selling strategy using a logit and a nested logit model of demand on a panel of Italian newspapers. I show that supplements increase the readership both in the weekday of issue and in the average weekday. This suggests that supplements are a way to attract new readers for the newspaper. This promotional effect is due both to business stealing and to market expansion.
    JEL: L11 L82 C33
    Date: 2004
  13. By: Elena Argentesi; Lapo Filistrucchi
    Abstract: The newspaper industry is a two-sided market: the readers market and the advertising market are closely linked by inter-market network externalities. We estimate market power in the Italian newspaper industry by building a structural model which encompasses a demand estimation for differentiated products on both sides of the market and where profit maximization by the publishing firms takes into account the interactions between them. The question that we address is whether the observed price pattern is consistent with profit-maximizing behavior by competing firms or is instead driven by some form of (tacit or explicit) coordinated practice.
    Keywords: demand estimation, market power, two-sided markets, newspapers, differentiated products.
    JEL: L11 L40 L82 C33
    Date: 2005
  14. By: Ernst Fehr (University of Zurich); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: There is abundant evidence that many individuals violate the rationality assumptions routinely made in economics. However, powerful evidence also indicates that violations of individual rationality do not necessarily refute the aggregate predictions of standard economic models that assume full rationality of all agents. Thus, a key question is how the interactions between rational and irrational people shape the aggregate outcome in markets and other institutions. We discuss evidence indicating that strategic complementarity and strategic substitutability are decisive determinants of aggregate outcomes. Under strategic complementarity, a small amount of individual irrationality may lead to large deviations from the aggregate predictions of rational models, whereas a minority of rational agents may suffice to generate aggregate outcomes consistent with the predictions of rational models under strategic substitutability.
    Keywords: bounded rationality; strategic interaction; strategic complementarity
    JEL: D50 D84
    Date: 2005–07
  15. By: Florian Zettelmeyer; Fiona Scott Morton; Jorge Silva-Risso
    Abstract: There is convincing evidence that the Internet has lowered the prices paid by some consumers in established industries, for example, term life insurance and car retailing. However, current research does not reveal much about how using the Internet lowers prices. This paper answers this question for the auto retailing industry. We use direct measures of search behavior and consumer characteristics to investigate how the Internet affects negotiated prices. We show that the Internet lowers prices for two distinct reasons. First, the Internet helps consumers learn the invoice price of dealers. Second, the referral process of online buying services, a novel institution made possible by the Internet, also helps consumers obtain lower prices. The combined information and referral price effects are -1.5%, corresponding to 22% of dealers' average gross profit margin per vehicle. We also find that buyers with a high disutility of bargaining benefit from information on the specific car they eventually purchased while buyers who like the bargaining process do not. The results suggest that the decisions consumers make to use the Internet to gather information and to use the negotiating clout of an online buying service have a real effect on the prices paid by these consumers.
    JEL: L11 L15 L62 D82 M31
    Date: 2005–08
  16. By: Yooki Park; Suzanne Scotchmer
    Abstract: As it becomes cheaper to copy and share digital content, vendors are turning to technical protections such as encryption. We argue that if protection is nevertheless imperfect, this transition will generally lower the prices of content relative to perfect legal enforcement. However, the effect on prices depends on whether the content providers use independent protection standards or a shared one, and if shared, on the governance of the system. Even if a shared system permits content providers to set their prices independently, the equilibrium prices will depend on how the vendors share the costs. We show that demand-based cost sharing generally leads to higher prices than revenue-based cost sharing. Users, vendors and the antitrust authorities will typically have different views on what capabilities the DRM system should have. We argue that, when a DRM system is implemented as an industry standard, there is a potential for "collusion through technology."
    JEL: L13 L14 L15 K21 O33
    Date: 2005–08
  17. By: Yongchun Baek; Randall Jones; Michael Wise
    Abstract: <P>Maintaining rapid economic growth depends increasingly on productivity gains, particularly in the service sector. Competition has an important role to play in achieving such gains. However, Korea’s development strategy has tended to weaken competition and has left a legacy of government intervention. Strengthening competition requires upgrading competition policy, increasing openness to international trade and foreign direct investment and improving the regulatory framework in network industries. In particular, the power of the Korea Fair Trade Commission should be expanded, while raising the level of sanctions and scaling back special treatment for certain sectors. Barriers to imports remain above the OECD average, particularly in agriculture, while the stock of inward direct investment is among the lowest in the OECD area. Restructuring plans in the network industries, notably electricity and gas, have lagged behind schedule. Price distortions and the absence of independent ...</P> <P>Concurrence sur les marchés de produits et performances économiques en Corée <P>Le maintien d'une croissance économique rapide est de plus en plus tributaire des gains de productivité, en particulier dans le secteur des services. La concurrence a un rôle important à jouer dans la réalisation de ces gains. Néanmoins, la stratégie de développement de la Corée a eu tendance à affaiblir la concurrence et se traduit par une politique interventionniste héritée du passé. Le renforcement de la concurrence passe par une rénovation de la politique de la concurrence, une ouverture accrue aux échanges internationaux ainsi qu'à l'investissement direct étranger (IDE), et une amélioration du cadre réglementaire dans les industries de réseau. Il conviendrait de renforcer les prérogatives de la Commission coréenne de la concurrence, tout en alourdissant les sanctions prévues par la loi et en revoyant à la baisse les dispositions spéciales prévues pour certains secteurs. Les obstacles aux importations demeurent supérieurs à la moyenne de l'OCDE, notamment dans l'agriculture ...</P>
    Keywords: telecommunications, télécommunications, regulatory reform, network industries, réforme de la réglementation, industries de réseau, commerce de détail, Trade policy, politique commerciale, Korea, Corée, foreign direct investment, investissement direct étranger, anti-trust law, competition law, cartel, retail sector, droit de la concurrence, entente, législation antitrust, South Korean economy, electricity, gas, tariffs, chaebol, économie sud-coréenne, électricité, gaz, tarifs douaniers, chaebol
    JEL: F13 F21 K21 L11 L40 L43 L81 L94 L95 L96 O53 O57 Q17
    Date: 2004–08–09
  18. By: Jens Høj; Michael Wise
    Abstract: <P>Following the deep recession in the early 1990s growth has been strong, but the scope for economic catch-up remains considerable and cross-country empirical evidence suggests that enhancing competition is an important means of achieving this. Structural reforms to strengthen competition in the early 1990s did boost growth and were also ahead of similar developments in the EU. However, indicators suggest that relatively weak competition remains in a number of sectors. Moreover, potential competition is reduced by a sparse population and relative long distances to large markets, which together with the prevalence of local monopolies and public ownership in many network industries, point to the need for greater vigilance to sustain and promote competition. Further reforms to promote product market competition should focus on fundamental changes in the regulatory approach as well as more incremental measures to intensify competition. The competition authority should concentrate ...</P> <P>Concurrence sur le marché des biens et performance économique en Finlande <P>Après la sévère récession des années 1990, la croissance économique a été forte mais la convergence en termes de la productivité est encore loin d’être complète et les comparaisons empiriques internationales suggèrent qu’un renforcement de la concurrence pourrait résorber une part significative de ce retard. Certes, les réformes structurelles mises en œuvre au début des années 1990 pour renforcer la concurrence ont soutenu la croissance et ont même souvent été plus précoces qu’au sein de l’Union Européenne. Néanmoins, divers indicateurs suggèrent que le degré de concurrence reste insuffisant dans de nombreux secteurs. En outre, le degré potentiel de concurrence reste contenu en raison de l’éparpillement de la population et l’éloignement par rapport des longues distances d’accès aux grands marchés, qui, combinés à l’importance des monopoles locaux et de l’actionnariat de l’état dans de nombreuses industries de réseaux, suggèrent la nécessité d’une vigilance renforcée pour ...</P>
    Keywords: regulatory reform, network industries, Finland, Finlande, competition law, productivity and growth, retail sector, public procurement, droit de la concurrence, productivité et croissance, product market competition, public ownership, concurrence sur le marché des biens, réforme structurelle, vente au détail, industries de réseaux, achat public, secteur public
    JEL: K21 L11 L16 L33 L43 L81 L87 L9 O57
    Date: 2004–12–20
  19. By: Halevy, Yoram; Milchtaich, Igal
    Abstract: We study a competitive market for a homogeneous good, in which the only uncertainty concerns the number of identical sellers, who are sampled by a finite Poisson process from a continuum of potential participants. It is shown that, in equilibrium, there is price dispersion. Specifically, prices conform to a Poisson process on an interval, which is a proper subset of that between the sellers' cost and the buyers' reservation price. Although prices arbitrarily close to the latter may occur in equilibrium, they are less frequent than prices at the lower end of the pricing interval.
    JEL: C7 D4 D8 L1
    Date: 2005–07–26
  20. By: Mehmet Bac (Sabancý University); Serkan Kucuksenel (California Institute of Technology)
    Abstract: We introduce ex-ante collusion whereby the supervisor stops monitoring for a transfer payment from the agent, in addition to ex-post collusion following the monitoring outcome. Extending a well-known model of hierarchy, we study the determinants of ex-ante collusion and show that, depending on the parameter values we identify, the principal can ignore either ex-post or ex-ante collusion.
    Keywords: hierarchy, incentives, collusion
    JEL: D82 L22
    Date: 2005–08–04
  21. By: Eric Thivant (University Jean Moulin Lyon 3 - Centre de Recherche de l'IAE - Equipe de Recherche SICOMOR); Laid Bouzidi (University Jean Moulin Lyon 3 - Centre de Recherche de l'IAE - Equipe de Recherche SICOMOR)
    Abstract: This research investigates the problem of Information Technologies Standards or Recommendations from an economical point of view. In our competitive economy, most enterprises adopted standardization’s processes, following recommendations of specialized Organisations such as ISO (International Organisation for Standardization), W3C (World Wide Web Consortium) and ISOC (Internet Society) in order to reassure their customers. But with the development of new and open internet standards, different enterprises from the same sector fields, decided to develop their own IT standards for their activities. So we will hypothesis that the development of a professional IT standard required a network of enterprises but also a financial support, a particular organizational form and a precise activity to describe. In order to demonstrate this hypothesis and understand how professional organise themselves for developing and financing IT standards, we will take the Financial IT Standards as an example. So after a short and general presentation of IT Standards for the financial market, based on XML technologies, we will describe how professional IT standards could be created (nearly 10 professional norms or recommendations appear in the beginning of this century). We will see why these standards are developed outside the classical circles of standardisation organisations, and what could be the “key factors of success” for the best IT standards in Finance. We will use a descriptive and analytical method, in order to evaluate the financial support and to understand these actors’ strategies and the various economical models described behind. Then, we will understand why and how these standards have emerged and been developed. We will conclude this paper with a prospective view on future development of standards and recommendations.
    Keywords: information technologies, financial standards, development of standards, evaluation of the economical costs of standards
    JEL: L
    Date: 2005–07–27
  22. By: Panayotis Dessyllas (Said Business School, University of Oxford); Alan Hughes (Centre for Business Research, University of Cambridge)
    Abstract: In this paper we investigate the incidence of high technology acquisitions using a large international sample of acquisitions by public high technology firms. Controlling for firms’ financial characteristics, we examine the impact of the following innovation- related factors on the propensity to acquire: R&D-intensity as a proxy for R&D inputs; the citation-weighted patent-intensity as a proxy for R&D output; the stock of citation-weighted patents as a proxy for the accumulated stock of knowledge generated by past R&D efforts. The following conclusions can be drawn with respect to the characteristics of acquirers of non-public targets – mainly private firms and former subsidiaries. First, we find support for the view that the propensity to acquire new knowledge-related assets through acquisitions is driven by declining returns from the exploitation of a firm’s existing knowledge base. Second, we find evidence in favour of the make-or-buy theory that acquisitions are a substitute for in-house R&D activity. Third, our results are in accordance with the theoretical argument that a large stock of accumulated knowledge enhances a firm’s ability to absorb external knowledge through acquisitions. These results suggest that smaller acquisitions can be seen as part of an innovation strategy by acquiring firms with relatively low levels of internal R&D which seek to offset low R&D productivity by exploring a range of potential innovation trajectories in new and smaller business units. Interestingly, we find that these interpretations cannot be made for acquirers of the larger public companies.
    Keywords: Mergers and acquisitions, acquisition likelihood, R&D, patents
    JEL: G34 O30 L20
    Date: 2005–07–27
  23. By: Daisuke Nikae (Osaka City University); Takeshi Ikeda (Osaka City University)
    Abstract: This paper introduces the economic theory of gquasi-exclusive territory.h We consider vertical dealings with two upstream firms and four downstream firms that compete in two separate markets. Under quasi- exclusive territory, downstream firms are bound to pay additional charges when selling goods beyond their territorial areas. We find that with respect to the two-part tariffs comprising a marginal price and a fixed fee, quasi-exclusive territory is more beneficial for upstream firms and more harmful for consumers than conventional exclusive territory. Moreover, we note that quasi-exclusive territory is in practice in various vertical dealings and that its regulation is a difficult task.
    Keywords: Exclusive territory, Quasi-exclusive territory, Vertical dealings, Two-part tariff
    JEL: D43 L22 L42 R32
    Date: 2005–08–01
  24. By: Nejat Anbarci (Department of Economics, Florida International University); Brett Katzman (Department of Economics and Finance, Kennesaw State University)
    Abstract: The prominent Herfindahl-Hirschman index (HHI), yields a higher concentration level in response to any merger between firms, implying that any merger will decrease the social welfare. Although HHI is used by the Anti-trust Division of the U.S. Department of Justice (AD-DoJ), its merger implications are not fully embraced by the anti-trust authorities. We propose a class of concentration indices that is in line with the spirit of the AD-DoJ’s merger policies and consider different theoretical models which indicate that the AD-DoJ is justified in allowing mergers especially among smaller firms, as they counter the market power of dominant firms.
    Keywords: Horizontal Mergers, Industry Concentration, the Anti-Trust Division, Hirfindahl-Hirschman Index (HHI), Dominant Firm(s)
    JEL: L0
    Date: 2005–03
  25. By: Panagis Liossatos (Department of Economics, Florida International University)
    Abstract: This essay seeks to develop an integrated account of the workings of statistical mechanics and thermodynamics as a theory of economic equilibrium. It begins with a probabilistic description of general systems (made out of numerous elements), based on the practice of statistical physics and the work of E. T. Jaynes, and a self-contained overview of the arguments that lead to the concept of statistical entropy as a measure of uncertainty or disorder and the maximum statistical entropy principle . This provides the conceptual setting for developing a statistical mechanical model of general equilibrium in pure exchange economies, inspired by the statistical theory of markets of Duncan K. Foley. Emphasis is placed in the derivation of the properties of the entropy function of an economy—the maximized statistical entropy as a function of the amounts of resources in that economy. We then show that the statistical equilibrium theory of pure exchange economies gives rise to a phenomenological or ‘macro’ theory of resource allocation in the image of classical thermodynamics (and the generalized thermodynamics of L. I. Rozonoer). We thus establish the fundamental principle of the phenomenological theory—the maximum entropy principle—and illustrate its use for the study of isolated and small open economies.
    Keywords: statistical entropy, thermodynamics, general equilibrium, physics
    JEL: D5
    Date: 2004–07

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