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Utilization and maintenance in a model with scrapping

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Author Info

  • Bitros, George C.
  • Flytzanis, Elias

Abstract

We consider a productive asset, called equipment or capital good, and we examine the properties of, as well as the interactions between, the operating policies, which are determined by its optimal utilization and maintenance, and the capital policy of scrapping, which defines the optimal time when the productive asset is retired from its current use. Starting with an abstract model and using the approach of optimal control, initially we characterize the various types of equipment by assigning to them a single total profit index, which indicates how the above policies affect the flow of operating revenues plus capital gains or losses. This index is a function of market-determined prices. So using it we then investigate how the operating and capital policies are influenced by the rate of discount, the price of new equipment, and the rise or fall of the price of new equipment relative to the value of its output. Among other interesting results, we find that the effects of these prices on the nature and interactions of optimal policies depend crucially on whether the equipment is of the usual profit making type, where output is the main source of revenue, or of the antique type, where the main source of revenue is capital gains.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 194 (2009)
Issue (Month): 2 (April)
Pages: 551-573

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Handle: RePEc:eee:ejores:v:194:y:2009:i:2:p:551-573

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Web page: http://www.elsevier.com/locate/eor

Related research

Keywords: Utilization Maintenance Idling Mothballing Upgrading Downgrading Scrapping;

References

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  1. Omar LICANDRO & Luis A. PUCH, 2000. "Capital Utilization, Maintenance Costs and the Business Cycle," Annales d'Economie et de Statistique, ENSAE, issue 58, pages 143-164.
  2. Morton I. Kamien & Nancy L. Schwartz, 1971. "Optimal Maintenance and Sale Age for a Machine Subject to Failure," Management Science, INFORMS, vol. 17(8), pages B495-B504, April.
  3. Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," Papers 0062, Boston University - Industry Studies Programme.
  4. Parks, Richard W, 1977. "Determinants of Scrapping Rates for Postwar Vintage Automobiles," Econometrica, Econometric Society, vol. 45(5), pages 1099-1115, July.
  5. Bitros, G.C. & Flytzanis, E.G., 2001. "Towards A General Theory of Real Capital," DEOS Working Papers 126, Athens University of Economics and Business.
  6. Das, Sanghamitra, 1991. "A semiparametric structural analysis of the idling of cement kilns," Journal of Econometrics, Elsevier, vol. 50(3), pages 235-256, December.
  7. Winston, Gordon C, 1974. "The Theory of Capital Utilization and Idleness," Journal of Economic Literature, American Economic Association, vol. 12(4), pages 1301-20, December.
  8. Everson, Carol K, 1982. "Dynamic Demand for Utilization, Maintenance, Installations and Retirements of Railroad Freight Cars," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 429-46, June.
  9. Collard, Fabrice & Kollintzas, Tryphon, 2000. "Maintenance, Utilization, and Depreciation along the Business Cycle," CEPR Discussion Papers 2477, C.E.P.R. Discussion Papers.
  10. Takayama,Akira, 1985. "Mathematical Economics," Cambridge Books, Cambridge University Press, number 9780521314985, December.
  11. Bitros, George C, 1976. "A Statistical Theory of Expenditures in Capital Maintenance and Repair," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 917-36, October.
  12. Kim, Moshe, 1988. "The Structure of Technology with Endogenous Capital Utilization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 111-30, February.
  13. Malcomson, James M., 1975. "Replacement and the rental value of capital equipment subject to obsolescence," Journal of Economic Theory, Elsevier, vol. 10(1), pages 24-41, February.
  14. Parks, Richard W, 1979. "Durability, Maintenance and the Price of Used Assets," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 197-217, April.
  15. Ellen R. McGrattan & James A. Schmitz, Jr., 1999. "Maintenance and repair: too big to ignore," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
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Cited by:
  1. George Bitros, 2010. "The theorem of proportionality in contemporary capital theory: An assessment of its conceptual foundations," The Review of Austrian Economics, Springer, vol. 23(4), pages 367-401, December.

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