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Sunk Costs and the Natural Resource Extraction Sector: Analytical Models and Historical Examples of Hysteresis and Strategic Behavior in the Americas

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  • Bradford L. Barham
  • Jean-Paul Chavas
  • Oliver T. Coomes

Abstract

Sunk costs play a significant role in shaping industry conduct and development outcomes associated "with the resource extraction sector. Their role is explored here by: (1) developing analytical models that show specifically how sunk costs influence investment behavior and outcomes; and (2) considering the historical experience during major epochs of two important extractive industries. The models demonstrate how sunk costs, in conjunction with uncertainty or strategic behavior, can severely distort efficiency and equity outcomes. The Amazon rubber boom and bust and the pan-American aluminum industry illustrate the significance of sunk costs in the extractive sector and beyond.

Suggested Citation

  • Bradford L. Barham & Jean-Paul Chavas & Oliver T. Coomes, 1998. "Sunk Costs and the Natural Resource Extraction Sector: Analytical Models and Historical Examples of Hysteresis and Strategic Behavior in the Americas," Land Economics, University of Wisconsin Press, vol. 74(4), pages 429-448.
  • Handle: RePEc:uwp:landec:v:74:y:1998:i:4:p:429-448
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    Cited by:

    1. Giuliano Curatola & Michael Donadelli & Patrick GrĂ¼ning & Christoph Meinerding, 2016. "Investment-Specific Shocks, Business Cycles, and Asset Prices," Bank of Lithuania Working Paper Series 36, Bank of Lithuania.
    2. Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.
    3. repec:bla:pacecr:v:22:y:2017:i:1:p:43-82 is not listed on IDEAS
    4. Chung, Chris Changwha & Beamish, Paul W., 2005. "Investment mode strategy and expatriate strategy during times of economic crisis," Journal of International Management, Elsevier, vol. 11(3), pages 331-355, September.
    5. Aggarwal, Rimjhim M. & Narayan, Tulika A., 2004. "Does inequality lead to greater efficiency in the use of local commons? The role of strategic investments in capacity," Journal of Environmental Economics and Management, Elsevier, vol. 47(1), pages 163-182, January.
    6. Heemskerk, Marieke, 2001. "Do international commodity prices drive natural resource booms? An empirical analysis of small-scale gold mining in Suriname," Ecological Economics, Elsevier, vol. 39(2), pages 295-308, November.

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