Sunk Costs, Depreciation, and Industry Dynamics

  • Adelina Gschwandtner (Contributor)
  • Val E. Lambson (Contributor)

Activity: Talk or presentationScience to professionals/public

Description

Dynamic competitive models of industry evolution suggest that the variability of firm value over time should be higher and the variability of the number of firms over time should be lower in industries where sunk entry costs, the difference between the entry cost and the scrap value, are higher. These two predictions have done well empirically. Here we generalize the theory to allow an additional category of sunk costs, depreciation, and argue that these generate the opposite effects. We test these assertions using a newly constructed data set consisting of more than 150 US companies over a period longer than 50 years. The results are consistent with the theory.
Period5 Jun 2007
Event titleReseach Seminar Presentation
Event typeUnkonwn