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Protection and employment under uncertainty: a real option approach

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  • Yu-Fu Chen
  • I-Hui Cheng

Abstract

The paper explores the effect of protection lobbying by solving a firm's dynamic optimization problem where there is uncertainty about future demand, the success of lobbying and non-zero entry/exit costs. It is found that firms in declining industries tend to lobby to prevent shutting down factories during economic turndowns. In contrast, firms in growing industries tend to lobby to prevent other firms from entering the market. The degree of this effect depends on the ratio of exit costs to entry costs. It is shown that the higher the ratio, the stronger the effect.

Suggested Citation

  • Yu-Fu Chen & I-Hui Cheng, 2005. "Protection and employment under uncertainty: a real option approach," Applied Economics, Taylor & Francis Journals, vol. 37(2), pages 229-238.
    • Handle: RePEc:taf:applec:v:37:y:2005:i:2:p:229-238
    DOI: 10.1080/00036840412331315033
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    References listed on IDEAS

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    1. Magee,Stephen P. & Brock,William A. & Young,Leslie, 1989. "Black Hole Tariffs and Endogenous Policy Theory," Cambridge Books, Cambridge University Press, number 9780521377003, January.
    2. Bovenberg, A. Lans & Graafland, Johan J. & de Mooij, Ruud A., 2000. "Tax reform and the Dutch labor market: an applied general equilibrium approach," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 193-214, October.
    3. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Entry and Asymmetric Lobbying: Why Governments Pick Losers," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 1064-1093, September.
    4. Banks,Jeffrey S. & Hanushek,Eric Allen (ed.), 1995. "Modern Political Economy," Cambridge Books, Cambridge University Press, number 9780521478106.
    5. Banks,Jeffrey S. & Hanushek,Eric Allen (ed.), 1995. "Modern Political Economy," Cambridge Books, Cambridge University Press, number 9780521472333.
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    Cited by:

    1. Jyh-Bang Jou & Tan (Charlene) Lee, 2011. "Mutually exclusive investment with technical uncertainty," Applied Economics, Taylor & Francis Journals, vol. 43(30), pages 4723-4728.
    2. Syster C. Maart-Noelck & Oliver Musshoff & Moritz Maack, 2013. "The impact of price floors on farmland investments: a real options based experimental analysis," Applied Economics, Taylor & Francis Journals, vol. 45(35), pages 4872-4882, December.
    3. Jan Hinrichs & Oliver Musshoff & Martin Odening, 2008. "Economic hysteresis in hog production," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 333-340.

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