Entrants often need to make considerable sunk investments with highly uncertain returns. The option to exit if returns are low reduces investment risks and stimulates innovation. In this paper, Michele Bisceglia (University of Toulouse) and Jorge Padilla, Joe Perkins, and Salvatore Piccolo of Compass Lexecon examine the interaction between exit policy and up-front investment by … Continued
In this paper, Jorge Padilla, Joe Perkins, and Paul Reynolds focus on industries that require intensive investment to compete and innovate well before demand materializes (or fails to do so). In these industries, the existence of exit barriers may cause firms to become “zombies” ex-post and result in significant underinvestment ex-ante. They first discuss the link between the investment decisions of firms and the existence and significance of exit barriers. Then, they consider the role of mergers as an exit mechanism that promotes efficient investment and fosters competition. They conclude with a discussion about optimal merger policy.