Are Exit Decisions Capital Replacement Decisions? Evidence from the Tanker Industry

This paper presents a structural model for the exit process of heterogeneous agents in which assumptions of market organization affect economic behavior. In this framework the market for oil tanker carriers provides a unique paradigm for an empirical assessment of the impact of financial versus capital replacement variables on exit behavior under perfect competition. In this setting we challenge Koopman's earlier assertion (Zannetos, 1966) that namely exit decisions correspond to capital replacement. Aggregate models of exit are proposed and brought to real data in the tanker market industry. Their specification is tested through econometric methods and appears very sympathetic to scrapping dynamics. The empirical findings verify the abundance of financial variables over capital replacement, as well as the importance of market organization on capital investment decisions.