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Maintenance and investment : Complements or Substitutes ? A Reappraisal

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  • Raouf BOUCEKKINE

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Giorgio FABBRI

    (UNIVERSITA DI NAPOLI, Dipartimento di Studi Economici, “Parthenope”)

  • Fausto GOZZI

    (UNIVERSITA LUISS-GUIDO CARLI ROME, Dipartimento di Scienze Economiche ed Aziendali)

Abstract

A benchmark AK optimal growth model with maintenance expenditures and endogeneous 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, 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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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2009010.

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Length: 31
Date of creation: 01 Apr 2009
Date of revision:
Handle: RePEc:ctl:louvir:2009010

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Keywords: Maintenance; investment; optimal control; dynamic programming; infinite dimensional problem;

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References

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  1. Raouf Boucekkine & Omar Licandro & Luis A. Puch & Fernando del Rio, 2003. "Vintage capital and the dynamics of the AK model," Documentos de Trabajo del ICAE 0310, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  2. BOUCEKKINE, Raouf & DEL RIO, Fernando & MARTINEZ, Blanca, . "Technological progress, obsolescence, and depreciation," CORE Discussion Papers RP -2116, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Karl Whelan, 2000. "Computers, obsolescence, and productivity," Finance and Economics Discussion Series 2000-06, Board of Governors of the Federal Reserve System (U.S.).
  4. Askenazy, Philippe & Le Van, 1997. "A model of optimal growth strategy," CEPREMAP Working Papers (Couverture Orange) 9707, CEPREMAP.
  5. Feldstein, Martin S & Rothschild, Michael, 1974. "Towards an Economic Theory of Replacement Investment," Econometrica, Econometric Society, vol. 42(3), pages 393-423, May.
  6. 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.
  7. Sarantis Kalyvitis, 2006. "model: an empirical analysis of aggregate business capital spending with maintenance expenditures," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1282-1315, November.
  8. Pantelis Kalaitzidakis & Sarantis Kalyvitis, 2005. "“New” Public Investment and/or Public Capital Maintenance for Growth? The Canadian Experience," Economic Inquiry, Western Economic Association International, vol. 43(3), pages 586-600, July.
  9. 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, vol. 32(9), pages 3032-3053, September.
  10. Omar Licandro & Luis A. Puch & J. Ramón Ruiz-Tamarit, . "Optimal Growth under Endogenous Depreciation, Capital Utilization and Maintenance Costs," Working Papers 2000-23, FEDEA.
  11. Hartl, Richard, 1983. "Optimal maintenance and production rates for a machine : A nonlinear economic control problem," Journal of Economic Dynamics and Control, Elsevier, vol. 6(1), pages 281-306, September.
  12. Fabbri, Giorgio & Gozzi, Fausto, 2008. "Solving optimal growth models with vintage capital: The dynamic programming approach," Journal of Economic Theory, Elsevier, vol. 143(1), pages 331-373, November.
  13. 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.
  14. Kalaitzidakis, Pantelis & Kalyvitis, Sarantis, 2004. "On the macroeconomic implications of maintenance in public capital," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 695-712, March.
  15. 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, vol. 4(3), pages 381-410.
  16. BOUCEKKINE, Raouf & RUIZ-TAMARIT, Ramon, . "Capital maintenance and investment: complements or substitutes?," CORE Discussion Papers RP -1630, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  17. Nickell, Stephen, 1975. "A closer look at replacement investment," Journal of Economic Theory, Elsevier, vol. 10(1), pages 54-88, February.
  18. 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.
  19. Collard, Fabrice & Kollintzas, Tryphon, 2000. "Maintenance, Utilization, and Depreciation along the Business Cycle," CEPR Discussion Papers 2477, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Hippolyte D'Albis & Emmanuelle Augeraud-Véron & Hermen Jan Hupkes, 2013. "Multiple Solutions in Systems of Functional Differential Equations," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00786419, HAL.
  2. Raouf Boucekkine & David De La Croix & Omar Licandro, 2011. "Vintage capital theory: Three breakthroughs," Working Papers halshs-00599074, HAL.
  3. Giorgio Fabbri, 2014. "Ecological Barriers and Convergence: A Note on Geometry in Spatial Growth Models," Documents de recherche 14-05, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  4. Alice Albonico & Sarantis Kalyvitis & Evi Pappa, . "Capital Maintenance and Depreciation over the Business Cycle," DEOS Working Papers 1326, Athens University of Economics and Business.
  5. repec:hal:journl:halshs-00786419 is not listed on IDEAS
  6. Raouf Boucekkine & David de la Croix & Omar Licandro, 2011. "Vintage capital growth theory: Three breakthroughs," UFAE and IAE Working Papers 875.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  7. Giorgio Fabbri & Raouf Boucekkiney & Fausto Gozzi, 2012. "Egalitarism Under Population Change: the Role of Growth and Lifetime Span," DEGIT Conference Papers c017_007, DEGIT, Dynamics, Economic Growth, and International Trade.
  8. Raouf Boucekkine & Giorgio Fabbri & Fausto Gozzi, 2010. "Life span and the problem of optimal population size," Working Papers halshs-00536073, HAL.
  9. Raouf Boucekkine & Giorgio Fabbri & Patrick-Antoine Pintus, 2011. "On the optimal control of a linear neutral differential equation arising in economics," Working Papers halshs-00576770, HAL.
  10. Alice Albonico & Sarantis Kalyvitis & Evi Pappa, 2011. "Real Business Cycles with Capital Maintenance," Quaderni di Dipartimento 147, University of Pavia, Department of Economics and Quantitative Methods.
  11. Barañano Mentxaka, Ilaski & Romero-Avila, Diego, 2013. "Long-Term Growth and Persistence with Endogenous Depreciation: Theory and Evidence," IKERLANAK Ikerlanak;2013-68, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.

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