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Exit Dynamics with Rational Expectations

We develop an econometric model for firm exit, using stochastic dynamic programming (SDP) as a starting point. According to SDP, the value of an operating firm can be written as the sum of (i) the net present value of continuing production if the firm is committed to a future exit date, and (ii) the value of the exit option. By approximating the option value by a simple function of its determinants, we derive an expression for the distribution of firm exit probabilities. The model is estimated by pseudo likelihood methods using panel data from the Norwegian Manufacturing Statistics. The applicability of the model is illustrated by assessing to what extent quotas on emissions of carbondioxide increase exits in manufacturing sectors.

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Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 291.

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Date of creation: Dec 2000
Date of revision:
Handle: RePEc:ssb:dispap:291
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  1. Zvi Griliches & Tor Jakob Klette, 1999. "Empirical patterns of firm growth and R&D investment: a quality ladder model interpretation," IFS Working Papers W99/25, Institute for Fiscal Studies.
  2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  3. Lawrence H. Summers, 1987. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 295-304 National Bureau of Economic Research, Inc.
  4. Gourieroux,Christian & Monfort,Alain, 1995. "Statistics and Econometric Models," Cambridge Books, Cambridge University Press, number 9780521477444.
  5. John Rust, 1997. "Using Randomization to Break the Curse of Dimensionality," Econometrica, Econometric Society, vol. 65(3), pages 487-516, May.
  6. Pindyck, Robert S, 1979. "Interfuel Substitution and the Industrial Demand for Energy: An International Comparison," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 169-79, May.
  7. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, vol. 58(5), pages 1151-80, September.
  8. repec:oup:restud:v:59:y:1992:i:2:p:277-97 is not listed on IDEAS
  9. Stern, Steven, 1997. "Approximate Solutions to Stochastic Dynamic Programs," Econometric Theory, Cambridge University Press, vol. 13(03), pages 392-405, June.
  10. Pakes, A. & Ericson, R., 1990. "Empirical Implications Of Alternative Models Of Firm Dynamics," Papers 594, Yale - Economic Growth Center.
  11. G. Steven Olley & Ariel Pakes, 1992. "The Dynamics of Productivity in the Telecommunications Equipment Industry," NBER Working Papers 3977, National Bureau of Economic Research, Inc.
  12. Denny, Michael & Fuss, Melvyn A, 1977. "The Use of Approximation Analysis to Test for Separability and the Existence of Consistent Aggregates," American Economic Review, American Economic Association, vol. 67(3), pages 404-18, June.
  13. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  14. Pesaran, M. Hashem & Smith, Ron, 1995. "The role of theory in econometrics," Journal of Econometrics, Elsevier, vol. 67(1), pages 61-79, May.
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