Abstract:

This paper presents evidence that large-sample, cross-sectional distributions of the rate of return on capital (RoC) realized by enterprises across twenty European economies exhibit the same functional form: Double-stretched-exponential distributions. To account for this observation, the paper develops a systemic, economic model of the macroscopic outcomes of the competitive actions of arbitrageurs who seek profits defined by heterogeneity across values of RoC. The model suggests the observed distributions embody competitively established aggregate tradeoffs between the pecuniary returns and costs arbitrageurs incur. Those costs can be taken as rising on the measure of organization the actions of arbitrageurs impose on distributions of RoC, ensuring competition effectively prices informational gains in ways we can observe. The paper’s discussion defines a series of new, observable, macroscopic measures of the performance of competitive systems. It also points to the aptness of understanding prices as parts of structures of generalized Marx-Sraffa “prices of production,” predicated on the characteristics of capital-market statistical equilibria; to a general theoretical approach to the regulation of certain economic quantities by arbitrage; and to the role the costs of informational gains play in shaping observable outcomes in the operation of certain types of goal-seeking, self-organizing systems.

Citation:

dos Santos, P.L. & Yang, J. (2018). 'Arbitrage, Information, and the Competitive Organization of Distributions of Profitability'. INET Oxford Working Paper No. 2018-13.
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