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Entry and Exit Decisions under Uncertainty

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  • Dixit, Avinash K

Abstract

A firm's entry and exit decisions when the output price follows a random walk are examined. An idle firm and an active firm are viewed as assets that are call options on each other. The solution is a pair of trigger prices for entry and exit. The entry trigger exceeds the variable cost plus the interest on the entry cost, and the exit trigger is less than the variable cost minus the interest on the exit cost. These gaps produce "hysteresis." Numerical solutions are obtained for several parameter values; hysteresis is found to be significant even with small sunk costs. Copyright 1989 by University of Chicago Press.

Suggested Citation

  • Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
  • Handle: RePEc:ucp:jpolec:v:97:y:1989:i:3:p:620-38
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    7. Matthew S. Goldberg, 1982. "Discrimination, Nepotism, and Long-Run Wage Differentials," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 307-319.
    8. George J. Borjas, 1986. "The Self-Employment Experience of Immigrants," Journal of Human Resources, University of Wisconsin Press, vol. 21(4), pages 485-506.
    9. A. D. Roy, 1951. "Some Thoughts On The Distribution Of Earnings," Oxford Economic Papers, Oxford University Press, vol. 3(2), pages 135-146.
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