IDEAS home Printed from https://ideas.repec.org/a/sae/amerec/v62y2017i1p43-65.html
   My bibliography  Save this article

Shutdown Decision of Firms Based on Variable Costs and Demand

Author

Listed:
  • Hakan Uslu
  • Larry Teeter

Abstract

The forest products industry in Alabama, the second largest manufacturing sector of the state, has been experiencing a recession in production, number of establishments and employees since the mid-1990s. This study investigates the determinants of this decline in the industry, using a county-level panel dataset that spans the period between 1996 and 2012. Four sub-sectors were analyzed separately, including the logging, wood, paper, and furniture manufacturing sectors. Results suggest that increases in average variable cost, rather than decreases in demand, were more strongly associated with the recession as measured by the number of operating establishments. Decomposition analysis indicates that the cost of materials, rather than labor, contributes more to the decline in the number of forest sector establishments in the state. This could be because increases in labor costs, such as wage increases, are accompanied by increases in labor productivity.

Suggested Citation

  • Hakan Uslu & Larry Teeter, 2017. "Shutdown Decision of Firms Based on Variable Costs and Demand," The American Economist, Sage Publications, vol. 62(1), pages 43-65, March.
    • Handle: RePEc:sae:amerec:v:62:y:2017:i:1:p:43-65
    DOI: 10.1177/0569434516653748
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0569434516653748
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0569434516653748?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Bairak, Roman I. & Hughes, David W., 1996. "Evaluating the Impacts of Agricultural Exports on a Regional Economy," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 28(2), pages 393-407, December.
    2. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Business Cycles and the Relationship Between Concentration and Price-Cost Margins," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 1-17, Spring.
    3. Everett, Jim & Watson, John, 1998. "Small Business Failure and External Risk Factors," Small Business Economics, Springer, vol. 11(4), pages 371-390, December.
    4. William E. Wecker, 1978. "Predicting Demand from Sales Data in the Presence of Stockouts," Management Science, INFORMS, vol. 24(10), pages 1043-1054, June.
    5. Bael, David & Sedjo, Roger A., 2006. "Toward Globalization of the Forest Products Industry: Some Trends," RFF Working Paper Series dp-06-35, Resources for the Future.
    6. Fuss,Melvyn A. & Waverman,Leonard, 2006. "Costs and Productivity in Automobile Production," Cambridge Books, Cambridge University Press, number 9780521031752.
    7. Conrad IV, Joseph L. & Bolding, M. Chad & Aust, W. Michael & Smith, Robert L., 2010. "Wood-to-energy expansion, forest ownership changes, and mill closure: Consequences for U.S. South's wood supply chain," Forest Policy and Economics, Elsevier, vol. 12(6), pages 399-406, July.
    8. Rutger Hoekstra & Jeroen van den Bergh, 2002. "Structural Decomposition Analysis of Physical Flows in the Economy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 23(3), pages 357-378, November.
    9. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1986. "The Intertemporal Stability of the Concentration-Margins Relationship," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 13-34, September.
    10. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64, Elsevier.
    11. Robert A. Peterson & George Kozmetsky & Nancy M. Ridgway, 1983. "Perceived Causes of Small Business Failures: A Research Note," Entrepreneurship Theory and Practice, , vol. 8(1), pages 15-19, July.
    12. John Paul Broussard & Sheree A. Buchenroth & Eugene A. Pilotte, 2004. "CEO Incentives, Cash Flow, and Investment," Financial Management, Financial Management Association, vol. 33(2), Summer.
    13. Kako, Toshiyuki, 1980. "An Application of the Decomposition Analysis of Derived Demand for Factor Inputs in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 300-301, May.
    14. Toshiyuki Kako, 1978. "Decomposition Analysis of Derived Demand for Factor Inputs: The Case of Rice Production in Japan," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(4), pages 628-635.
    15. Brian Headd, 2001. "Business Success: Factors Leading to Surviving and Closing Successfully," Working Papers 01-01, Center for Economic Studies, U.S. Census Bureau.
    16. Mulligan, Casey B, 1997. "Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1061-1079, October.
    17. N/A, 1983. "American Journal of Small Business," Entrepreneurship Theory and Practice, , vol. 7(3), pages 61-61, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nico Dewaelheyns & Cynthia Hulle, 2008. "Legal reform and aggregate small and micro business bankruptcy rates: evidence from the 1997 Belgian bankruptcy code," Small Business Economics, Springer, vol. 31(4), pages 409-424, December.
    2. Jackson André da Silva & Nério Amboni & Anacleto Ângelo Ortigara & Alexandre Marino Costa, 2014. "Business DNA: an Analysis of Micro and Small Companies in the State of Santa Catarina," Brazilian Business Review, Fucape Business School, vol. 11(2), pages 115-134, March.
    3. James J. Chrisman & John Leslie, 1989. "Strategic, Administrative, and Operating Problems: The Impact of Outsiders on Small Firm Performance," Entrepreneurship Theory and Practice, , vol. 13(3), pages 37-52, April.
    4. Micha Gisser & Raymond Sauer, 2000. "The Aggregate Relation between Profits and Concentration is Consistent with Cournot Behavior," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 16(3), pages 229-246, May.
    5. A. B. Ibrahim & J. R. Goodwin, 1986. "Perceived Causes of Success in Small Business," Entrepreneurship Theory and Practice, , vol. 11(2), pages 41-50, October.
    6. Carmen García & Joan Ramon Borrell & José Manuel Ordóñez-de-Haro & Juan Luis Jiménez, 2022. "Managers’ expectations, business cycles and cartels’ life cycle," European Journal of Law and Economics, Springer, vol. 53(3), pages 451-484, June.
    7. James J. Chrisman & Alan Bauerschmidt & Charles W. Hofer, 1998. "The Determinants of New Venture Performance: An Extended Model," Entrepreneurship Theory and Practice, , vol. 23(1), pages 5-29, October.
    8. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
    9. Richard B. Carter & Howard E. Van Auken, 1991. "Personal Equity Investment and Small Business Financial Difficulties," Entrepreneurship Theory and Practice, , vol. 15(2), pages 51-60, January.
    10. Metzger, Georg, 2007. "Personal Experience: A Most Vicious and Limited Circle!? On the Role of Entrepreneurial Experience for Firm Survival," ZEW Discussion Papers 07-046 [rev.], ZEW - Leibniz Centre for European Economic Research.
    11. Simon Feeny & Mark Harris & Mark Rogers, 2005. "A dynamic panel analysis of the profitability of Australian tax entities," Empirical Economics, Springer, vol. 30(1), pages 209-233, January.
    12. Vincenzo Maggioni & Mario Sorrentino & Mary Williams, 1999. "Mixed Consequences of Government Aid for New Venture Creation: Evidence from Italy," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 3(3), pages 287-305, September.
    13. Deeds, David L. & Decarolis, Dona & Coombs, Joseph E., 1997. "The impact of firmspecific capabilities on the amount of capital raised in an initial public offering: Evidence from the biotechnology industry," Journal of Business Venturing, Elsevier, vol. 12(1), pages 31-46, January.
    14. Giannis Karagiannis & Kostas Velentzas, 1997. "Explaining Food Consumption Patterns In Greece," Journal of Agricultural Economics, Wiley Blackwell, vol. 48(1‐3), pages 83-92, January.
    15. Philip D. Olson, 1985. "Entrepreneurship: Process and Abilities," Entrepreneurship Theory and Practice, , vol. 10(1), pages 25-31, July.
    16. Steven J. Torok & Dale J. Menkhaus & Alan Schroeder, 1991. "Management assistance needs of small food and kindred products processors," Agribusiness, John Wiley & Sons, Ltd., vol. 7(5), pages 447-461.
    17. Wallace N. Davidson III & Dipa Dutia, 1991. "Debt, Liquidity, and Profitability Problems in Small Firms," Entrepreneurship Theory and Practice, , vol. 16(1), pages 53-64, October.
    18. Henryk Gurgul & Paweł Zając, 2014. "The impact of alterations in the local insolvency legislation on business bankruptcy rates in Poland," Statistics in Transition new series, Główny Urząd Statystyczny (Polska), vol. 15(3), pages 453-466, June.
    19. Jakubson, George & Jeong, Kap-Young & Kim, Donghun & Masson, Robert T., 2004. "Oligopolistic "Agreement" and/or "Superiority"?: New Findings from New Methodologies and Data," Research Reports 25181, University of Connecticut, Food Marketing Policy Center.
    20. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Business Cycles and Oligopoly Supergames: Some Empirical Evidence on Prices and Margins," NBER Working Papers 2057, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    demand; variable costs; labor productivity; shutdown; forest products industry;
    All these keywords.

    JEL classification:

    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:amerec:v:62:y:2017:i:1:p:43-65. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://journals.sagepub.com/home/aex .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.