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What Fraction of a Capital Investment Is Sunk Costs?

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  • Asplund, Marcus

Abstract

To what extent are capital investments sunk costs? This question is addressed by examining the salvage values of discarded metalworking machinery. Even though such assets are expected to be non-specific, many discarded assets are scrapped rather than sold on second-hand markets. Econometric results suggest that firms can only expect to get back 20-50 percent of the initial price of a "new" machine once it is installed. The results also indicate differences in value-age profiles across firms, but provide only weak support for the hypothesis that salvage values are particularly low during recessions. Copyright 2000 by Blackwell Publishing Ltd

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Industrial Economics.

Volume (Year): 48 (2000)
Issue (Month): 3 (September)
Pages: 287-304

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Handle: RePEc:bla:jindec:v:48:y:2000:i:3:p:287-304

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  1. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
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  5. Kessides, Ioannis N, 1990. "Market Concentration, Contestability, and Sunk Costs," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 614-22, November.
  6. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  7. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1343-66, September.
  8. Showalter, Mark H, 1994. "A Monte Carlo Investigation of the Box-Cox Model and a Nonlinear Least Squares Alternative," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 560-70, August.
  9. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(357), pages 95-106, March.
  10. Oliner, Stephen D, 1996. "New Evidence on the Retirement and Depreciation of Machine Tools," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 34(1), pages 57-77, January.
  11. Baumol, William J & Willig, Robert D, 1981. "Fixed Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 96(3), pages 405-31, August.
  12. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 297-326, October.
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Cited by:
  1. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(3), pages 390-408, April.
  2. Alessandro Gavazza, 2011. "The Role of Trading Frictions in Real Asset Markets," American Economic Review, American Economic Association, vol. 101(4), pages 1106-43, June.
  3. Werner Hölzl, 2003. "Tangible and intangible sunk costs and the entry and exit of firms in Austrian Manufacturing," Working Papers, Vienna University of Economics Research Group: Growth and Employment in Europe: Sustainability and Competitiveness geewp33, Vienna University of Economics Research Group: Growth and Employment in Europe: Sustainability and Competitiveness.
  4. Driver, Ciaran & Guedes, Maria João Coelho, 2012. "Research and development, cash flow, agency and governance: UK large companies," Research Policy, Elsevier, vol. 41(9), pages 1565-1577.
  5. Javalgi, Rajshekhar (Raj) G. & Deligonul, Seyda & Dixit, Ashutosh & Cavusgil, S. Tamer, 2011. "International Market Reentry: A Review and Research Framework," International Business Review, Elsevier, vol. 20(4), pages 377-393, August.
  6. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
  7. Werner Holzl, 2005. "Tangible and intangible sunk costs and the entry and exit of firms in a small open economy: the case of Austria," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(21), pages 2429-2443.
  8. Werner Hölzl, 2012. "Mobility Barriers and the Speed of Market Selection," WIFO Working Papers, WIFO 437, WIFO.
  9. Mukoyama, Toshihiko, 2008. "Endogenous depreciation, mismeasurement of aggregate capital, and the productivity slowdown," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(1), pages 513-522, March.
  10. Ciaran Driver & Paul Temple & Giovanni Urga, 2005. "Contrasts Between Classes of Assets in Fixed Investment Equations as a Way of Testing Real Option Theory," School of Economics Discussion Papers, School of Economics, University of Surrey 0805, School of Economics, University of Surrey.
  11. Guthrie, Graeme, 2013. "A value premium without operating leverage," Finance Research Letters, Elsevier, Elsevier, vol. 10(1), pages 1-11.
  12. Konstantinos Drakos, 2006. "A note on uncertainty and investment across the spectrum of irreversibility," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(13), pages 873-876.
  13. Evans, Lewis T. & Guthrie, Graeme A., 2005. "Risk, price regulation, and irreversible investment," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 23(1-2), pages 109-128, February.

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