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Modelling economic hysteresis losses caused by sunk adjustment costs
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...
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| Published in: | MAGKS - Joint Discussion Paper Series in Economics (Band 36-2015) |
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| Main Authors: | , |
| Format: | Article |
| Language: | English |
| Published: |
Philipps-Universität Marburg
2015
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| Subjects: | |
| Online Access: | PDF Full Text |
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| Summary: | 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 ferromagneti 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. |
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| Physical Description: | 32 Pages |
| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2024.0395 |