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International Economics

2005

Regulation of renewable resource industries

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Sunk Cost And Entry-Exit Decisions Under Individual Transferable Quotas: Why Industry Restructuring Is Delayed, Niels Vestergaard, Frank Jensen, Henning P. Jørgensen Dec 2004

Sunk Cost And Entry-Exit Decisions Under Individual Transferable Quotas: Why Industry Restructuring Is Delayed, Niels Vestergaard, Frank Jensen, Henning P. Jørgensen

Niels Vestergaard

The paper shows that explicit modelling of sunk cost and a firm's entry-exit decision in a traditional deterministic investment model may give an explanation of the slow transition to the optimal fleet structure following the introduction of individual transferable quotas (ITQs). The analysis shows that the annual lease unit price of quota may be in a range where the long-run fieet structure will not be attainable at once. Over time, firms with zero gross investment as optimal behavior may leave the industry as the capital decays and over the transition period the optimal fieet structure prevails.