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Entry, Exit And Scrapping Decisions With Investment Lags: A Series Of Investment Models Based On A New Approach

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  • Sødal, Sigbjørn

Abstract

Several entry-exit models under price uncertainty are discussed by a new markup approach to investment, starting with the classical model by Dixit (1989). The markup approach, introduced by Dixit et al. (1999), enables us to state the expected value of the firm in the entry-exit model as a function of a chosen pair of entry and exit trigger prices. The optimal policy appears by maximizing the value function with respect to the trigger prices. Extensions being discussed include endogenous production costs, diminishing production capacity over time, limits to the number of available switches, and various models with scrapping decisions and investment lags. The main new extension allows for an investment lag in the entry-exit-scrapping model by Dixit (1988). Implications of the investment lag are investigated by use of experimental data and empirical data from shipping. We also correct some results on investment lags from Bar-Ilan and Strange (1996).

Suggested Citation

  • Sødal, Sigbjørn, 2001. "Entry, Exit And Scrapping Decisions With Investment Lags: A Series Of Investment Models Based On A New Approach," University of California at Santa Barbara, Economics Working Paper Series qt7wg8z42b, Department of Economics, UC Santa Barbara.
    • Handle: RePEc:cdl:ucsbec:qt7wg8z42b
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    4. Bar-Ilan, Avner & Strange, William C., 1998. "A model of sequential investment," Journal of Economic Dynamics and Control, Elsevier, vol. 22(3), pages 437-463, March.
    5. Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-622, June.
    6. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    7. Dixit, Avinash & Pindyck, Robert S & Sodal, Sigbjorn, 1999. "A Markup Interpretation of Optimal Investment Rules," Economic Journal, Royal Economic Society, vol. 109(455), pages 179-189, April.
    8. John V. Leahy, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 1105-1133.
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