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Sunk Entry Costs, Sunk Depreciation costs, and Industry Dynamics

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Dynamic competitive models of industry evolution predict higher variability of firm value over time and lower variability of firm activity over time in industries where sunk entry costs are higher. These predictions have done well empirically. Here we extend the theory to allow an additional category of sunk costs---depreciation---and argue that this generates countervailing effects. We test this assertion empirically and find the results are consistent with the theory.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0902.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0902.

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Date of creation: Mar 2009
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Handle: RePEc:vie:viennp:0902

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Web page: http://www.univie.ac.at/vwl

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  1. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
  2. Lambson, Val Eugene, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 125-42, January.
  3. Cabral, Luis, 1995. "Sunk Costs, Firm Size and Firm Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 161-72, June.
  4. Jorgenson, D.W., 1994. "Empirical Studies of Depriciation," Harvard Institute of Economic Research Working Papers 1704, Harvard - Institute of Economic Research.
  5. Gschwandtner, Adelina & Lambson, Val E., 2002. "The effects of sunk costs on entry and exit: evidence from 36 countries," Economics Letters, Elsevier, vol. 77(1), pages 109-115, September.
  6. Adelina Gschwandtner & Val E. Lambson, 2006. "Sunk Costs, Profit Variability, and Turnover," Economic Inquiry, Western Economic Association International, vol. 44(2), pages 367-373, April.
  7. Lambson, Val Eugene & Jensen, Farrell E, 1998. "Sunk Costs and Firm Value Variability: Theory and Evidence," American Economic Review, American Economic Association, vol. 88(1), pages 307-13, March.
  8. Lambson, Val Eugene & Jensen, Farrell E, 1995. "Sunk Costs and the Variability of Firm Value over Time," The Review of Economics and Statistics, MIT Press, vol. 77(3), pages 535-44, August.
  9. Kessides, Ioannis N, 1990. "Market Concentration, Contestability, and Sunk Costs," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 614-22, November.
  10. repec:att:wimass:8904 is not listed on IDEAS
  11. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Entry, Exit and Establishment Survival in UK Manufacturing," Journal of Industrial Economics, Wiley Blackwell, vol. 51(1), pages 91-112, 03.
  12. Hulten, Charles R & Wykoff, Frank C, 1996. "Issues in the Measurement of Economic Depreciation: Introductory Remarks," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 10-23, January.
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