Location: 368A Heady Hall
We model dynamic competition in which firms make initial capital investment de- cisions followed by repeated entry and exit choices as demand fluctuates. We show a correspondence between competitive equilibrium and the solution to a planner’s problem, which establishes equilibrium existence and provides a platform for computation. We apply the framework to model electricity generator investment decisions, incorporating generator startup costs as the entry/exit friction. Market frictions are particularly important when evaluating renewable energy policies. The presence of startup costs reduces wind turbine profits, leading to as much as 60% lower uptake of wind investment for a given renewable subsidy level.
Contact Person: Ivan Rudik