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Entry and Exit Decisions under Uncertainty
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.
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Cited by
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Bernard, A. B., & Jensen, J. B. (2004) · Review of Economics and Statistics · doi:10.1162/003465304323031111 · Cited by 1,591
Persistence of power, Elites, and institutions
Acemoglu, D., & Robinson, J. A. (2008) · American Economic Review · doi:10.1257/aer.98.1.267 · Cited by 1,268
Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network
Kogut, B., & Kulatilaka, N. (1994) · Management Science · doi:10.1287/mnsc.40.1.123 · Cited by 1,131
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Handley, K., & Limão, N. (2017) · American Economic Review · doi:10.1257/aer.20141419 · Cited by 988
Metadata
- Authors
- Dixit, A.
- Venue
- Journal of Political Economy
- Publisher
- University of Chicago Press
- Published
- 1989-06
- Volume
- 97
- Issue
- 3
- Pages
- 620-638
- ISSN
- 0022-3808 (ISSN-L)
- 1537-534X
- OpenAlex
- W2087076079
- Cited by
- 2,341
- References
- 0
- FWCI
- 54.72
- Type
- journal article
- Language
- en
- Open access
- closed
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- Dixit, A. (1989). Entry and Exit Decisions under Uncertainty. Journal of Political Economy. https://doi.org/10.1086/261619
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