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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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14000.

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Date of creation: May 2008
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Publication status: published as Boyan Jovanovic, 2009. "When should firms invest in old capital?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 107-123.
Handle: RePEc:nbr:nberwo:14000

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  1. Jovanovic, Boyan & Nyarko, Yaw, 1996. "Learning by Doing and the Choice of Technology," Econometrica, Econometric Society, vol. 64(6), pages 1299-1310, November.
  2. Boyan Jovanovic & Peter L. Rousseau, 2002. "Mergers as Reallocation," NBER Working Papers 9279, National Bureau of Economic Research, Inc.
  3. Diego Comin & Bart Hobiijn, 2006. "An Exploration of Technology Diffusion," NBER Working Papers 12314, National Bureau of Economic Research, Inc.
  4. Hyeok Jeong & Yong Kim, 2006. "Complementarity and Transition to Modern Economic Growth," IEPR Working Papers 06.44, Institute of Economic Policy Research (IEPR).
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  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. 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.
  9. Boyan Jovanovic, 1998. "Vintage Capital and Inequality," NBER Working Papers 6416, National Bureau of Economic Research, Inc.
  10. Boldrin, Michele & Levine, David K., 2001. "Growth Cycles and Market Crashes," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 13-39, January.
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  13. 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.
  14. Aruga, Osamu, 2007. "Conventional or New? Optimal Investment Allocation across Vintages of Technology," MPRA Paper 6043, University Library of Munich, Germany.
  15. Gort, M. & Greenwood, J. & Rupert, P., 1998. "Measuring the Rate of Technological Progress in Structures," RCER Working Papers 457, University of Rochester - Center for Economic Research (RCER).
  16. Evsey D. Domar, 1963. "Total Productivity and the Quality of Capital," Journal of Political Economy, University of Chicago Press, vol. 71, pages 586.
  17. 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.
  18. Matthias Kredler, 2010. "Experience vs. Obsolescence: A Vintage-Human-Capital Model," 2010 Meeting Papers 369, Society for Economic Dynamics.
  19. repec:fth:starer:9816 is not listed on IDEAS
  20. Antonio R. Sampayo & Luis A. Puch & Omar Licandro, 2006. "Secondhand market and the lifetime of durable goods," Working Papers 2006-10, FEDEA.
  21. repec:fth:starer:98-16 is not listed on IDEAS
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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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