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Back to the Future: Economic Self-Organisation and Maximum Entropy Prediction
This paper shows that signal restoration methodology is appropriate for
predicting the equilibrium state of certain economic systems. A formal justification
for this is provided by proving the existence of finite improvement paths in object allocation
problems under weak assumptions on preferences, linking any initial condition
to a Nash equilibrium. Because a finite improvement path is made up of a sequence
of systematic best-responses, backwards movement from the equilibrium back to the
initial condition can be treated like the realisation of a noise process. This underpins
the use of signal restoration to predict the equilibrium from the initial condition, and an
illustration is provided through an application of maximum entropy signal restoration
to the Schelling model of segregation
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