Entry and exit decisions based on a discount factor approach

Entry and exit decisions under price uncertainty are discussed by a discount factor approach to investment. The approach makes it possible to express the value of the firm as a function of a set of trigger prices at which investment takes place, and to determine the optimal policy by simple maximization. Starting with a standard entry-exit model by Dixit [1989. Entry and exit decisions under uncertainty. Journal of political economy 97(3), 620-638], the paper expands to construction and scrapping decisions, investment lags, diminishing production capacity, and limits to the number of lay-up periods. Economic implications are investigated using experimental data and empirical shipping data. (c) 2005 Elsevier B.V. All rights reserved.