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Some Novel Implications of Replacemnt and Scrapping

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Author Info

  • Georgios Bitros

    (Athens University of Economics & Business)

Abstract

The emphasis of capital theory in recent decades has moved away from the implications of useful life as an important economic variable and has turned on the microeconomic and macroeconomic consequences of investment irreversibilities. Thus the voluminous literature that has developed ignores the marked difference be-tween replacement and scrapping and glosses over their significant implications for microeconomic and aggregate dynamics. This paper highlights the gains in explana-tory power that result when useful life, replacement and scrapping are placed in the center of the analysis. It does so by considering an economy with two representative firms that differ only in that the one applies replacement and the other scrapping. Among other interesting findings, at the microeconomic level it turns out that the de-mand for replacement investment is not invariant with respect to the type of capital policy being applied, whereas at the macroeconomic level it is shown that we cannot obtain consistent aggregates of capital stock and replacement investment.

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File URL: http://128.118.178.162/eps/mac/papers/0504/0504029.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0504029.

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Length: 19 pages
Date of creation: 21 Apr 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0504029

Note: Type of Document - pdf; pages: 19
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Web page: http://128.118.178.162

Related research

Keywords: Capital; investment; service life; replacement; scrapping;

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References

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  1. Eisner, Robert, 1972. "Components of Capital Expenditures: Replacement and Modernization Versus Expansion," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 297-305, August.
  2. Marcelo Veracierto, 1998. "Plant level irreversible investment and equilibrium business cycles," Working Paper Series WP-98-1, Federal Reserve Bank of Chicago.
  3. Feldstein, Martin S & Foot, David K, 1971. "The Other Half of Gross Investment: Replacement and Modernization Expenditures," The Review of Economics and Statistics, MIT Press, vol. 53(1), pages 49-58, February.
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Cited by:
  1. George C. Bitros, 2008. "The Optimal Lifetime Of Assets Under Uncertainty In The Rate Of Embodied Technical Change," Metroeconomica, Wiley Blackwell, vol. 59(2), pages 173-188, 05.

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