Entry under placement uncertainty
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2023-08-07
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Economics
Abstract
We present a model of firm entry in an industry that operates under an aggregate production quota or cap-and-trade (CAT) regulation. Firms are heterogeneous in their own productivity; each knows its costs of production but is uncertain about where its costs rank among an entrant population. We show the existence of a unique, symmetric, dominance solvable, Bayesian Nash equilibrium in switching strategies in a parameterized game with a continuum of players. Our main result is that uncertainty over one’s productivity rank is sufficient to cause socially inefficient over-entry when the average cost in the population of potential entrants is low. We find socially inefficient under-entry when the opposite conditions hold. Within both the class of models on global games with strategic substitutes and the class of models on firm entry, our model offers innovative insights into inefficient over-entry, under-entry, and introduces a novel underlying mechanism that drives entry bias.
Comments
JEL Classification: L2, C72, Q58
Length: 65 pages
Original Release Date: January 31, 2020
Revisions: February 20, 2021; February 24, 2021; May 28, 2022
Latest Revision: August 7, 2023
Length: 65 pages
Original Release Date: January 31, 2020
Revisions: February 20, 2021; February 24, 2021; May 28, 2022
Latest Revision: August 7, 2023