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Investment Under Uncertainty with Stochastically Switching Profit Streams: Entry and Exit over the Business Cycle

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  • Driffill John

    (University of London)

  • Raybaudi Marzia

    (University of Birmingham)

  • Sola Martin

    ()
    (University of London and Universidad Torcuato Di Tella)

Abstract

We study how entry and exit decisions of a monopolist are affected by business cycle conditions. We model the business cycle as a two-state Markov process, and assume that the demand curve faced by the monopolist evolves differently in the two states of the economy. We explore conditions under which the monopolist would enter or exit, either in a boom or a recession.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 7 (2003)
Issue (Month): 1 (April)
Pages: 1-40

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Handle: RePEc:bpj:sndecm:v:7:y:2003:i:1:n:1

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Cited by:
  1. Michael Funke & Yu-Fu Chen, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 20908, Hamburg University, Department of Economics.
  2. Makoto Goto & Katsumasa Nishide & Ryuta Takashima, 2013. "Irreversible Investment under Competition with a Markov Switching Regime," KIER Working Papers 861, Kyoto University, Institute of Economic Research.
  3. Yu-Fu Chen & Michael Funke, 2004. "Cyclical Uncertainty And Physical Investment Decisions," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 89, Money Macro and Finance Research Group.
  4. John Driffill & Martin Sola & Turalay Kenc, 2009. "Real Options with Priced Regime-Switching Risk," Department of Economics Working Papers, Universidad Torcuato Di Tella 2009-09, Universidad Torcuato Di Tella.
  5. Sodal, Sigbjorn, 2006. "Entry and exit decisions based on a discount factor approach," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(11), pages 1963-1986, November.
  6. Francisco Ruiz-Aliseda & Jianjun Wu, 2007. "Irreversible investment in stochastically cyclical markets," Economics Working Papers 1018, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Pierpaolo Benigno & Luca Antonio Ricci, 2010. "The Inflation-Output Trade-off with Downward Wage Rigidities," NBER Working Papers 15762, National Bureau of Economic Research, Inc.

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