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The optimal lifetime of assets under uncertainty in the rate of embodied technical change

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  • Bitros, George C.

Abstract

This paper investigates the effects of uncertainty emanating from technological im-provements on the optimal lifetime of assets. In does so in a dynamic model in which: a) technological change increases continuously the productivity of producers’ durables, b) po-tential competition induces firms to price their output in a way that passes all benefits to final consumers, and c) the mean and the variance are considered sufficient statistics to describe the probability distribution of technological change. From the analysis it turns out that in general this type of uncertainty shortens the optimal lifetime of assets. More specifically, the analysis shows that: replacement under uncertainty leads to optimal lifetimes of assets that are shorter than in any other mode of operation; depending on the mean rate of technological progress, , and the price elasticity of demand, , scrapping under uncertainty yields life-times that may be shorter or longer than those determined by replacement under certainty; and, irrespective of the values of these parameters, the optimal lifetime of assets from a pol-icy of scrapping under uncertainty is always shorter than that from scrapping under cer-tainty. However, the robustness of these results under alternative specifications of the prob-ability distribution of technological change remains an open question

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3620.

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Date of creation: May 2007
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Handle: RePEc:pra:mprapa:3620

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Keywords: service life; replacement; scrapping; embodied technical change; uncertainty;

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  1. 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.
  2. Georgios Bitros, 2005. "Some Novel Implications of Replacemnt and Scrapping," Macroeconomics 0504029, EconWPA.
  3. Fuss, Melvyn & McFadden, Daniel, 1978. "Production Economics: A Dual Approach to Theory and Applications (I): The Theory of Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 1, number fuss1978.
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Cited by:
  1. George Bitros, 2008. "Why the structure of capital and the useful lives of its components matter: A test based on a model of Austrian descent," The Review of Austrian Economics, Springer, vol. 21(4), pages 301-328, December.
  2. Bitros, George C., 2009. "The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Applicability," MPRA Paper 17821, University Library of Munich, Germany.
  3. 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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