Protection and Employment Under Uncertainty: A Real Option Approach

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