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Utilization and Maintenance in a Model with Terminal Scrapping

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Author Info
George Bitros (Athens University of Economics & Business)
Elias Flytzanis (Athens University of Econmics & Business)

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Abstract

We draw on three strands of literature dealing with utilization, maintenance, and scrapping in order to analyze the properties of the respective policies and their interac-tions. We do so by focusing on the last period of the received multi-period service life model and extending it in three directions: first, by associating the physical deteriora-tion of equipment to the intensity of its utilization and maintenance; second, by ex-panding on the range of explainable operating policies to allow for idling, mothballing, capacity depleting, capacity preserving, full capacity, upgrading, and downgrading; and, third, by linking the operating policies to the capital policy of scrapping. Owing to these enhancements, the analysis leads to several important findings. One among them is that optimal operating policies behave usually in opposite directions, proceed-ing in time from harder to softer or vice versa, depending on the net revenue earning capability of the equipment under consideration. Another is that profit (loss) making equipment is scrappable iff on the average the operating capital deteriorates faster (slower), or equivalently improves slower (faster), than the scrapping capital. And still an-other result is that operating policies are determined jointly with scrapping policy capi-tal policies, thus suggesting that empirical investigations of their determinants should allow for this simultaneity

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Paper provided by EconWPA in its series Macroeconomics with number 0411016.

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Length: 40 pages
Date of creation: 25 Nov 2004
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Handle: RePEc:wpa:wuwpma:0411016

Note: Type of Document - pdf; pages: 40
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Web page: http://129.3.20.41

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Related research
Keywords: Utilization; maintenance; idling; mothballing; capacity depleting; capacity pre-serving; upgrading; downgrading; scrapping;

Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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  1. Das, Sanghamitra, 1991. "A semiparametric structural analysis of the idling of cement kilns," Journal of Econometrics, Elsevier, vol. 50(3), pages 235-256, December. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
  3. Ye, Meng-Hua, 1990. "Optimal replacement policy with stochastic maintenance and operation costs," European Journal of Operational Research, Elsevier, vol. 44(1), pages 84-94, January. [Downloadable!] (restricted)
  4. Anna Alberini & Winston Harrington & Virginia McConnell, 1995. "Determinants of Participation in Accelerated Vehicle-Retirement Programs," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 93-112, Spring. [Downloadable!] (restricted)
  5. Matthew D. Shapiro, 1987. "Capital Utilization and Capital Accumulation: Theory and Evidence," NBER Working Papers 1900, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Collard, Fabrice & Kollintzas, Tryphon, 2000. "Maintenance, Utilization, and Depreciation along the Business Cycle," CEPR Discussion Papers 2477, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Johnson, Paul A., 1994. "Capital utilization and investment when capital depreciates in use: some implications and tests," Journal of Macroeconomics, Elsevier, vol. 16(2), pages 243-259. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. Omar Licandro & Luis A. Puch, 2000. "Capital Utilization, Maintenance Costs and the Business Cycle," Annales d'Economie et de Statistique, ADRES, issue 58, pages 06, Avril-Jui. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
  11. 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). [Downloadable!]
  12. 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. [Downloadable!] (restricted)
  13. Bischoff, Charles W & Kokkelenberg, Edward C, 1987. "Capacity Utilization and Depreciation-in-Use," Applied Economics, Taylor and Francis Journals, vol. 19(8), pages 995-1007, August.
  14. Russell Cooper & John Haltiwanger & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September. [Downloadable!] (restricted)
    Other versions:
  15. Howe, Keith M. & McCabe, George M., 1983. "On Optimal Asset Abandonment and Replacement," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(03), pages 295-305, September. [Downloadable!]
  16. Rosen, Sherwin & Nadiri, M Ishaq, 1974. "A Disequilibrium Model of Demand for Factors of Production," American Economic Review, American Economic Association, vol. 64(2), pages 264-70, May. [Downloadable!] (restricted)
    Other versions:
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