Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/125533
Authors: 
Göcke, Matthias
Matulaityte, Jolita
Year of Publication: 
2015
Series/Report no.: 
Joint Discussion Paper Series in Economics 36-2015
Abstract: 
Transition from one economic equilibrium to another as a consequence of shocks is often associated with sunk adjustment costs. Firm specific sunk market entry investments (or sunk market exit costs) in case of a reaction to price shocks are an example. These adjustment costs lead to a dynamic supply pattern similar to hysteresis. In analogy to "hysteresis losses" in ferromagnetism, we explicitly model dynamic adjustment losses in the course of market entry and exit cycles. We start from the micro level of a single firm and use explicit aggregation tools from hysteresis theory in mathematics and physics to calculate dynamic losses. We show that strong market fluctuations generate disproportionately large hysteresis losses for producers. This could give a reason for the implementation of stabilizing measures and policies to prevent strong (price) variations or, alternatively, to reduce the sunk entry and exit costs. However, the explicit inclusion of uncertainty (associated with an option value of waiting) is shown to reduce economic hysteresis losses.
Subjects: 
sunk-cost hysteresis
adjustment costs
dynamic losses
path-dependence
persistence
option value of waiting
JEL: 
B59
C61
D21
D69
Document Type: 
Working Paper

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