Is exit a firm failure? Facts and theory

Marques, A. and Brandão, A. (2010) Is exit a firm failure? Facts and theory. Acta Oeconomica, 60 (4). pp. 405-426. ISSN 0001-6373

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Abstract

Literature on firms’ entry and exit decisions provides empirical evidence that industries with many exits also have many entries. We present a paper that merges some different approaches to the entry and exit of firms and which proposes a new method for looking at the entrepreneurial decision. Our model theoretically supports what empirical evidence has shown and holds; that databases are not yet developed enough to understand the whole exit process. We demonstrate that the possibility of recovering some share of investment costs makes entry more than just a production decision. Within a defined time horizon, a firm can enter the market despite making a loss from production output since the firm’s return consists of both sales and investment cost recovery. Entry may be the optimal strategy even when the unit cost is higher than the market price.

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