Protection and Employment Under Uncertainty: A Real Option Approach

Posted: 11 Apr 2005

See all articles by I-Hui Cheng

I-Hui Cheng

National University of Kaohsiung - Department of Applied Economics

Yu-Fu Chen

University of Dundee - Department of Economic Studies

Abstract

In this paper we explore the effect of protection lobbying by solving a firm's dynamic optimisation problem where there is uncertainty about future demand, the success of lobbying and non-zero entry/exit costs. We find out that the firms in declining industries tend to lobbying in economic downturn to prevent shutting down factories. On the contrary, the firms in growing industries tend to lobby for preventing other firms from entering the market. The degree of this effect depends on the ratio of exit costs to entry costs. It is shown that the higher the ratio, the stronger the effect is.

Keywords: Uncertainty, employment, real options

JEL Classification: D72, D81, F13

Suggested Citation

Cheng, I-Hui and Chen, Yu-Fu, Protection and Employment Under Uncertainty: A Real Option Approach. Available at SSRN: https://ssrn.com/abstract=685745

I-Hui Cheng (Contact Author)

National University of Kaohsiung - Department of Applied Economics ( email )

700, Kaohsiung University Rd.
National University of Kaohsiung
Kaohsiung, 811
Taiwan

Yu-Fu Chen

University of Dundee - Department of Economic Studies ( email )

Dundee DD1 4HN, Scotland
United Kingdom
+44 1382 344 383 (Phone)
+44 1382 344 691 (Fax)

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