Sunk Entry Costs, Sunk Depreciation costs, and Industry Dynamics
Dynamic competitive models of industry evolution predict higher variability of firm value over time and lower variability of firm activity over time in industries where sunk entry costs are higher. These predictions have done well empirically. Here we extend the theory to allow an additional category of sunk costs---depreciation---and argue that this generates countervailing effects. We test this assertion empirically and find the results are consistent with the theory.
References listed on IDEAS
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- Jorgenson, Dale W, 1996.
"Empirical Studies of Depreciation,"
Western Economic Association International, vol. 34(1), pages 24-42, January.
- Jorgenson, D.W., 1994. "Empirical Studies of Depriciation," Harvard Institute of Economic Research Working Papers 1704, Harvard - Institute of Economic Research.
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- Hulten, Charles R & Wykoff, Frank C, 1996. "Issues in the Measurement of Economic Depreciation: Introductory Remarks," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 10-23, January.
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- Cabral, Luis, 1995. "Sunk Costs, Firm Size and Firm Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 161-72, June.
- Lambson, Val Eugene & Jensen, Farrell E, 1998. "Sunk Costs and Firm Value Variability: Theory and Evidence," American Economic Review, American Economic Association, vol. 88(1), pages 307-13, March.
- repec:att:wimass:8904 is not listed on IDEAS
- Adelina Gschwandtner & Val E. Lambson, 2006. "Sunk Costs, Profit Variability, and Turnover," Economic Inquiry, Western Economic Association International, vol. 44(2), pages 367-373, April.
- Kessides, Ioannis N, 1990. "Market Concentration, Contestability, and Sunk Costs," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 614-22, November.
- Val Eugene Lambson, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 125-142.
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