A conjecture on the distribution of firm profit

TL;DR

This paper challenges the common assumption of uniform profit rates across firms, proposing a probabilistic model that better explains the skewed distribution of profits observed empirically, including super-profits.

Contribution

It introduces a novel probabilistic framework to model the skewed distribution of firm profits, aligning theoretical predictions with empirical observations.

Findings

Distribution is skewed to the right with super-profits.

Mode is less than the mean, indicating asymmetry.

Qualitative consistency with empirical profit distributions.

Abstract

A common assumption of political economy is that profit rates across firms or sectors tend to uniformity, and often models are formulated in which this tendency is assumed to have been realised. But in reality this tendency is never realised and the distribution of firm profits is not degenerate but skewed to the right. The mode is less than the mean and super-profits are present. To understand the distribution of firm profits a general probabilistic argument is sketched that yields a candidate functional form. The overall properties of the derived distribution are qualitatively consistent with empirical measures, although there is more work to be done.