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When should firms invest in old capital?

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  • Boyan Jovanovic

Abstract

This paper studies optimal investment policies when the production function depends on capital of various vintages. In such an environment it is natural to ask whether the firm will invest in old-vintage capital at all. In this paper I derive such a condition. Predictably, investment in old capital takes place if the elasticity of substitution between old and new capital is low, and when the depreciation of capital is high. But other parameters such as the rates of technological progress and depreciation matter as well.

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Bibliographic Info

Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 5 (2009)
Issue (Month): 1 ()
Pages: 107-123

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Handle: RePEc:bla:ijethy:v:5:y:2009:i:1:p:107-123

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References

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  1. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
  2. Cooper, Russell & Haltiwanger, John, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," American Economic Review, American Economic Association, vol. 83(3), pages 360-82, June.
  3. Boldrin, Michele & Levine, David K., 2001. "Growth Cycles and Market Crashes," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 13-39, January.
  4. Diego Comin & Bart Hobijn, 2010. "An Exploration of Technology Diffusion," American Economic Review, American Economic Association, vol. 100(5), pages 2031-59, December.
  5. Aruga, Osamu, 2007. "Conventional or New? Optimal Investment Allocation across Vintages of Technology," MPRA Paper 6043, University Library of Munich, Germany.
  6. Boyan Jovanovic & Peter L. Rousseau, 2008. "Mergers as Reallocation," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 765-776, November.
  7. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
  8. Boldrin, Michele & Levine, David, 2002. "Factor Saving Innovation," CEPR Discussion Papers 3262, C.E.P.R. Discussion Papers.
  9. repec:fth:starer:9816 is not listed on IDEAS
  10. Diego Comin & Bart Hobijn, 2003. "Cross-country technology adoption: making the theories face the facts," Staff Reports 169, Federal Reserve Bank of New York.
  11. Jovanovic, B., 1998. "Vintage Capital and Equality," Working Papers 98-16, C.V. Starr Center for Applied Economics, New York University.
  12. Kredler, Matthias, 2008. "Experience vs. Obsolescence: A Vintage-Human-Capital Model," MPRA Paper 10200, University Library of Munich, Germany.
  13. Michael Gort & Jeremy Greenwood & Peter Rupert, 1999. "Measuring the Rate of Technological Progress in Structures," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 207-230, January.
  14. Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August.
  15. Dmitriy Stolyarov, 2002. "Turnover of Used Durables in a Stationary Equilibrium: Are Older Goods Traded More?," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1390-1413, December.
  16. Koeniger Winfried & Licandro Omar, 2006. "On the Use of Substitutability as a Measure of Competition," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-9, March.
  17. Antonio R. Sampayo & Luis A. Puch & Omar Licandro, 2006. "Secondhand market and the lifetime of durable goods," Working Papers 2006-10, FEDEA.
  18. Jovanovic, Boyan & Nyarko, Yaw, 1996. "Learning by Doing and the Choice of Technology," Econometrica, Econometric Society, vol. 64(6), pages 1299-1310, November.
  19. Hyeok Jeong & Yong Kim, 2006. "Complementarity and Transition to Modern Economic Growth," IEPR Working Papers 06.44, Institute of Economic Policy Research (IEPR).
  20. Evsey D. Domar, 1963. "Total Productivity and the Quality of Capital," Journal of Political Economy, University of Chicago Press, vol. 71, pages 586.
  21. Boyan Jovanovic, 1998. "Vintage Capital and Inequality," NBER Working Papers 6416, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jovanovic, Boyan & Yatsenko, Yuri, 2012. "Investment in vintage capital," Journal of Economic Theory, Elsevier, vol. 147(2), pages 551-569.

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