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Exit Dynamics with Adjustment Costs

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Author Info
Rolf Golombek and Arvid Raknerud () (Statistics Norway)

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Abstract

We use the Stock and Wise approximation of stochastic dynamic programming in order to identify the extent to which profitability can explain exit behavior. In our econometric model, heterogeneous firms engage in Bertrand (price) competition. Firms produce heterogeneous products, using labor, materials and capital as inputs. The stock of capital is changed through investments and disinvestments, where the firm incurs adjustment costs due to partial irreversibilities. The model is estimated for six manufacturing industries using Norwegian micro data for the period 1993-2002. We find that increased profitability lowers the exit probability, and this effect is statistically significant in all industries, while, ceteris paribus, high adjustment costs significantly decrease the probability of exit in five of the industries. Exiting firms are characterized by persistently, although only moderately higher, annual exit probabilities than the average firm. There is no tendency for exiting firms to have a high probability of exit just prior to exit.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 442.

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Date of creation: Dec 2005
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Handle: RePEc:ssb:dispap:442

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Related research
Keywords: Firm exit adjustment costs Bertrand game manufacturing firms mixed logit state space model.

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior

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