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Exit Dynamics with Rational Expectations

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  • Arvid Raknerud
  • Rolf Golombek

    ()
    (Statistics Norway)

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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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 291.

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Date of creation: Dec 2000
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Handle: RePEc:ssb:dispap:291

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Keywords: Exit dynamics; stochastic dynamic programming; option value; pseudo likelihood; dynamic panel data; random effects; environmental taxes;

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References

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  14. repec:att:wimass:9429 is not listed on IDEAS
  15. John Rust & Department of Economics & University of Wisconsin, 1994. "Using Randomization to Break the Curse of Dimensionality," Computational Economics 9403001, EconWPA, revised 04 Jul 1994.
  16. Gourieroux,Christian & Monfort,Alain, 1995. "Statistics and Econometric Models," Cambridge Books, Cambridge University Press, number 9780521405515, April.
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