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Maintenance and investment: complements or substitutes? A reappraisal

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  • BOUCEKKINE, Raouf
  • FABBRI, Giorgio
  • GOZZI, Fausto

Abstract

A benchmark AK optimal growth model with maintenance expenditures and endogenous utilization of capital is considered within an explicit vintage capital framework. Scrapping is endogenous, and the model allows for a clean distinction between age and usage dependent capital depreciation and obsolescence. It is also shown that in this set-up past investment profile completely determines the size of current maintenance expenditures. Among other findings, a closed-form solution to optimal dynamics is provided taking advantage of very recent development in optimal control of infinite dimensional systems. More importantly, and in contrast to the pre-existing literature, we study investment and maintenance co-movements without any postulated ad hoc depreciation function. In particular using impulse response experiments, we find that optimal investment and maintenance do move together in the short-run in response to neutral technological shocks, which seems to be more consistent with the data.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -2333.

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Handle: RePEc:cor:louvrp:-2333

Note: In : Journal of Economic Dynamics & Control, 34(12), 2420-2439, 2010
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References

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  1. Boucekkine, Raouf & Del Rio, Fernando & Licandro, Omar, 2000. "Vintage capital and the dynamics of the AK model," CEPREMAP Working Papers (Couverture Orange) 0003, CEPREMAP.
  2. Nickell, Stephen, 1975. "A closer look at replacement investment," Journal of Economic Theory, Elsevier, Elsevier, vol. 10(1), pages 54-88, February.
  3. Sarantis Kalyvitis, 2006. "model: an empirical analysis of aggregate business capital spending with maintenance expenditures," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 39(4), pages 1282-1315, November.
  4. Cagri Saglam & Vladimir M. Veliov, 2008. "Role of Endogenous Vintage Specific Depreciation in the Optimal Behavior of Firms," International Journal of Economic Theory, The International Society for Economic Theory, The International Society for Economic Theory, vol. 4(3), pages 381-410.
  5. Askenazy, Philippe & Le Van, 1997. "A model of optimal growth strategy," CEPREMAP Working Papers (Couverture Orange) 9707, CEPREMAP.
  6. Omar Licandro & Luis A. Puch & J. Ramón Ruiz Tamaritz, 2001. "Optimal Growth under Endogeneous Depreciation, Capital Utilization and Maintenance Costs," Documentos de Trabajo del ICAE, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico 0101, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  7. Goetz, Renan-Ulrich & Hritonenko, Natali & Yatsenko, Yuri, 2008. "The optimal economic lifetime of vintage capital in the presence of operating costs, technological progress, and learning," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(9), pages 3032-3053, September.
  8. Hartl, Richard, 1983. "Optimal maintenance and production rates for a machine : A nonlinear economic control problem," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 6(1), pages 281-306, September.
  9. Collard, Fabrice & Kollintzas, Tryphon, 2000. "Maintenance, Utilization, and Depreciation along the Business Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2477, C.E.P.R. Discussion Papers.
  10. Ellen R. McGrattan & James A. Schmitz, Jr., 1999. "Maintenance and repair: too big to ignore," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
  11. Kalaitzidakis, Pantelis & Kalyvitis, Sarantis, 2004. "On the macroeconomic implications of maintenance in public capital," Journal of Public Economics, Elsevier, Elsevier, vol. 88(3-4), pages 695-712, March.
  12. Fabbri, Giorgio & Gozzi, Fausto, 2008. "Solving optimal growth models with vintage capital: The dynamic programming approach," Journal of Economic Theory, Elsevier, Elsevier, vol. 143(1), pages 331-373, November.
  13. Karl Whelan, 2000. "Computers, obsolescence, and productivity," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-06, Board of Governors of the Federal Reserve System (U.S.).
  14. BOUCEKKINE, Raouf & DEL RIO, Fernando & MARTINEZ, Blanca, . "Technological progress, obsolescence, and depreciation," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2116, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Feldstein, Martin S & Rothschild, Michael, 1974. "Towards an Economic Theory of Replacement Investment," Econometrica, Econometric Society, Econometric Society, vol. 42(3), pages 393-423, May.
  16. Pantelis Kalaitzidakis & Sarantis Kalyvitis, 2005. "“New” Public Investment and/or Public Capital Maintenance for Growth? The Canadian Experience," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 43(3), pages 586-600, July.
  17. Fabbri, Giorgio & Gozzi, Fausto, 2006. "Vintage Capital in the AK growth model: a Dynamic Programming approach. Extended version," MPRA Paper 7334, University Library of Munich, Germany.
  18. BOUCEKKINE, Raouf & RUIZ-TAMARIT Ramon, 2001. "Capital Maintenance and Investment : Complements or Substitutes ?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  19. 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.
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Citations

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Cited by:
  1. Raouf Boucekkine & David de la Croix & Omar Licandro, 2011. "Vintage capital growth theory: Three breakthroughs," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 875.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Albonico, Alice & Kalyvitis, Sarantis & Pappa, Evi, 2014. "Capital maintenance and depreciation over the business cycle," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 39(C), pages 273-286.
  3. Alice Albonico & Sarantis Kalyvitis & Evi Pappa, 2011. "Real Business Cycles with Capital Maintenance," Quaderni di Dipartimento, University of Pavia, Department of Economics and Quantitative Methods 147, University of Pavia, Department of Economics and Quantitative Methods.
  4. Raouf Boucekkine & Giorgio Fabbri & Fausto Gozzi, 2010. "Life span and the problem of optimal population size," Working Papers halshs-00536073, HAL.
  5. Giorgio FABBRI, 2014. "Ecological Barriers and Convergence: a Note on Geometry in Spatial Growth Models," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2014014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  6. d’Albis, Hippolyte & Augeraud-Véron, Emmanuelle & Hupkes, Hermen Jan, 2014. "Multiple solutions in systems of functional differential equations," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 50-56.
  7. Barañano Mentxaka, Ilaski & Romero-Avila, Diego, 2013. "Long-Term Growth and Persistence with Endogenous Depreciation: Theory and Evidence," IKERLANAK, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I Ikerlanak;2013-68, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
  8. repec:hal:journl:halshs-00786419 is not listed on IDEAS
  9. Raouf Boucekkine & David De La Croix & Omar Licandro, 2011. "Vintage capital theory: Three breakthroughs," Working Papers halshs-00599074, HAL.
  10. Raouf Boucekkine & Giorgio Fabbri & Fausto Gozzi, 2012. "Egalitarism under Population Change. The Role of Growth and Lifetime Span," AMSE Working Papers 1211, Aix-Marseille School of Economics, Marseille, France.
  11. BOUCEKKINE, Raouf & FABBRI, Giorgio & PINTUS, Patrick, . "On the optimal control of a linear neutral differential equation arising in economics," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2449, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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