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The Effects of Uncertainty and Sunk Costs on Firms’ Decision-Making: Evidence from Net Entry, Industry Structure and Investment Dynamics

In: The Economics of Imperfect Markets

Author

Listed:
  • Vivek Ghosal

    (Georgia Institute of Technology)

Abstract

This paper presents selected evidence on the impact of uncertainty and sunk costs on firms’ decisions related to entry and exit, and investment expenditures. Evidence from a large sample of US manufacturing industries shows that greater uncertainty about profits significantly lowers net entry as well as investment. The negative effects are most pronounced in industries that are dominated by small firms and have high sunk costs. We note some implications for policy related to antitrust, employment and economic stabilization.

Suggested Citation

  • Vivek Ghosal, 2010. "The Effects of Uncertainty and Sunk Costs on Firms’ Decision-Making: Evidence from Net Entry, Industry Structure and Investment Dynamics," Contributions to Economics, in: Giorgio Calcagnini & Enrico Saltari (ed.), The Economics of Imperfect Markets, chapter 0, pages 167-182, Springer.
    • Handle: RePEc:spr:conchp:978-3-7908-2131-4_9
    DOI: 10.1007/978-3-7908-2131-4_9
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    Cited by:

    1. Marco de Pinto & Laszlo Goerke, 2022. "Cost uncertainty in an oligopoly with endogenous entry," Bulletin of Economic Research, Wiley Blackwell, vol. 74(4), pages 927-948, October.
    2. Hanee Ryu & Hyejae Jung, 2021. "Impact of public R&D as market matures: Evidence from solar PV industry," Energy & Environment, , vol. 32(8), pages 1543-1558, December.

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