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.