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What Fraction of a Capital Investment is Sunk Costs?

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  • Marcus Asplund

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.

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  • Marcus Asplund, 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
    DOI: 10.1111/1467-6451.00124
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    Cited by:

    1. Evans, Lewis & Guthrie, Graeme, 2006. "Incentive Regulation of Prices when Costs are Sunk," Working Paper Series 18971, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    2. 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.
    3. 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.
    4. 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.
    5. Evans, Lewis & Guthrie, Graeme, 2003. "Asset Stranding is Inevitable: Implications for Optimal Regulatory Design," Working Paper Series 18978, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    6. 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.
    7. Evans, Lewis & Guthrie, Graeme, 2005. "Risk, Price Regulation, and Irreversible Investment," Working Paper Series 18977, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    8. Robert D. Cairns, 2013. "The fundamental problem of accounting," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 634-655, May.
    9. 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.
    10. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
    11. repec:vuw:vuwscr:18971 is not listed on IDEAS
    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. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
    14. 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.
    15. repec:vuw:vuwscr:18977 is not listed on IDEAS
    16. Werner Hölzl, 2015. "Sunk costs and the speed of market selection," Journal of Evolutionary Economics, Springer, vol. 25(2), pages 323-344, April.
    17. Shibata, Takashi & Wong, Kit Pong, 2019. "Investment under uncertainty with variable costly reversibility," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 14-28.
    18. Mukoyama, Toshihiko, 2008. "Endogenous depreciation, mismeasurement of aggregate capital, and the productivity slowdown," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 513-522, March.
    19. 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.
    20. repec:vuw:vuwscr:18978 is not listed on IDEAS
    21. 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.
    22. Guthrie, Graeme, 2013. "A value premium without operating leverage," Finance Research Letters, Elsevier, vol. 10(1), pages 1-11.
    23. 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.
    24. Werner Hölzl, 2012. "Mobility Barriers and the Speed of Market Selection," WIFO Working Papers 437, WIFO.

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    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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