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What Fraction of a Capital Investment Is Sunk Costs?

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  • Asplund, Marcus

Abstract

To what extent are capital investments sunk costs? This question is addressed by examining the salvage values of discarded metalworking machinery. Even though such assets are expected to be non-specific, many discarded assets are scrapped rather than sold on second-hand markets. Econometric results suggest that firms can only expect to get back 20-50 percent of the initial price of a "new" machine once it is installed. The results also indicate differences in value-age profiles across firms, but provide only weak support for the hypothesis that salvage values are particularly low during recessions. Copyright 2000 by Blackwell Publishing Ltd

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  • Asplund, Marcus, 2000. "What Fraction of a Capital Investment Is Sunk Costs?," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 287-304, September.
  • Handle: RePEc:bla:jindec:v:48:y:2000:i:3:p:287-304
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    Cited by:

    1. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
    2. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
    3. Ciaran Driver & Paul Temple & Giovanni Urga, 2005. "Contrasts Between Classes of Assets in Fixed Investment Equations as a Way of Testing Real Option Theory," School of Economics Discussion Papers 0805, School of Economics, University of Surrey.
    4. Konstantinos Drakos, 2006. "A note on uncertainty and investment across the spectrum of irreversibility," Applied Economics Letters, Taylor & Francis Journals, vol. 13(13), pages 873-876.
    5. Evans, Lewis & Guthrie, Graeme, 2003. "Asset Stranding is Inevitable: Implications for Optimal Regulatory Design," Working Paper Series 3881, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    6. Driver, Ciaran & Guedes, Maria João Coelho, 2012. "Research and development, cash flow, agency and governance: UK large companies," Research Policy, Elsevier, vol. 41(9), pages 1565-1577.
    7. Werner Hölzl, 2003. "Tangible and intangible sunk costs and the entry and exit of firms in Austrian Manufacturing," Working Papers geewp33, Vienna University of Economics and Business Research Group: Growth and Employment in Europe: Sustainability and Competitiveness.
    8. Alessandro Gavazza, 2011. "The Role of Trading Frictions in Real Asset Markets," American Economic Review, American Economic Association, vol. 101(4), pages 1106-1143, June.
    9. Guthrie, Graeme, 2013. "A value premium without operating leverage," Finance Research Letters, Elsevier, vol. 10(1), pages 1-11.
    10. Werner Hölzl, 2012. "Mobility Barriers and the Speed of Market Selection," WIFO Working Papers 437, WIFO.
    11. Lewis Evans & Graeme Guthrie, 2006. "Incentive Regulation of Prices When Costs are Sunk," Journal of Regulatory Economics, Springer, vol. 29(3), pages 239-264, May.
    12. Evans, Lewis T. & Guthrie, Graeme A., 2005. "Risk, price regulation, and irreversible investment," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 109-128, February.
    13. Werner Hölzl, 2015. "Sunk costs and the speed of market selection," Journal of Evolutionary Economics, Springer, vol. 25(2), pages 323-344, April.
    14. Werner Holzl, 2005. "Tangible and intangible sunk costs and the entry and exit of firms in a small open economy: the case of Austria," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2429-2443.
    15. Mukoyama, Toshihiko, 2008. "Endogenous depreciation, mismeasurement of aggregate capital, and the productivity slowdown," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 513-522, March.
    16. Javalgi, Rajshekhar (Raj) G. & Deligonul, Seyda & Dixit, Ashutosh & Cavusgil, S. Tamer, 2011. "International Market Reentry: A Review and Research Framework," International Business Review, Elsevier, vol. 20(4), pages 377-393, August.

    More about this item

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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