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Exit Dynamics with Rational Expectations

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Abstract

We develop an econometric model for firm exit, using stochastic dynamic programming (SDP) as a starting point. According to SDP, the value of an operating firm can be written as the sum of (i) the net present value of continuing production if the firm is committed to a future exit date, and (ii) the value of the exit option. By approximating the option value by a simple function of its determinants, we derive an expression for the distribution of firm exit probabilities. The model is estimated by pseudo likelihood methods using panel data from the Norwegian Manufacturing Statistics. The applicability of the model is illustrated by assessing to what extent quotas on emissions of carbondioxide increase exits in manufacturing sectors.

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  • Arvid Raknerud & Rolf Golombek, 2000. "Exit Dynamics with Rational Expectations," Discussion Papers 291, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:291
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    More about this item

    Keywords

    Exit dynamics; stochastic dynamic programming; option value; pseudo likelihood; dynamic panel data; random effects; environmental taxes;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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