Sunk costs, Profit Volatility, and Turnover

Dynamic competitive models of industry evolution suggest that firm profit will be more volatile and turnover will be lower in industries with higher sunk costs. These implications are consistent with empirical observation.

Entry, Exit, and Imperfect Competition in the Long Run.

An infinite-horizon, stochastic model of entry and exit with sunk costs and imperfect competition is constructed. Simple examples provide insights into: (1) the relationship between sunk costs and industry concentration, (2) entry when current profits are negative, and (3) the relationship between entry and the length of the product cycle. A subgame perfect Nash equilibrium for the general dynamic stochastic game is shown to exist as a limit of finite-horizon equilibria. This equilibrium has a relatively simple structure characterized by two numbers per finite history. Under very general conditions, it tends to exhibit excessive entry and insufficient exit relative to a social optimum.entry, exit, dynamic games, integer constraints

Rushing to Overpay: The REIT Premium Revisited

We explore the questions of whether and why Real Estate Investment Trusts (REITs) pay more for real estate than non-REIT buyers, consequently breaking the law of one price. We develop a model where REITs optimally pay more for property because (1) they are able, due to capital access advantages and, (2) are occasionally compelled, due to regulatory time constraints on the deployment of capital. We show that the typically large (20 to 60 percent) and statistically significant (p-values less than 0.01) REIT-buyer premiums found in standard empirical hedonic pricing models are biased due to unobserved explanatory variables. Using a repeat-transaction methodology that controls for unobserved independent variables, we find the REIT-buyer premium to be about 5 percent. Furthermore, we show that REITs¿ ability (as measured by access to capital markets) and regulator compulsion (as measured by capital deployment deadlines) are related to the price premium.Real Estate Investment Trusts (REITs), commercial properties, hedonic price analysis, repeat transactions, market efficiency, law of one price, price premium

Sunk Costs, Depreciation, and Industry Dynamics

Two of the most robust results from dynamic competitive models of industrial organization suggest that higher sunk cost industries should exhibit (1) higher intertemporal variability in the market value of their firms, and (2) lower intertemporal variability in the size of their industries. These predictions have done well empirically. This paper argues on theoretical and empirical grounds that depreciation generates countervailing effects