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When should firms invest in old capital?

  • Boyan Jovanovic

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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1742-7363.2008.00096.x
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Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 5 (2009)
Issue (Month): 1 ()
Pages: 107-123

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Handle: RePEc:bla:ijethy:v:5:y:2009:i:1:p:107-123
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  1. Boyan Jovanovic, 1998. "Vintage Capital and Inequality," NBER Working Papers 6416, National Bureau of Economic Research, Inc.
  2. Cooper, Russell & Haltiwanger, John, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," American Economic Review, American Economic Association, vol. 83(3), pages 360-82, June.
  3. 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.
  4. repec:fda:fdaddt:2006-10 is not listed on IDEAS
  5. Comin, D. & Hobijn, B., 2003. "Cross-Country Technology Adoption: Making the Theories Face the Facts," Working Papers 03-04, C.V. Starr Center for Applied Economics, New York University.
  6. Boyan Jovanovic & Peter L. Rousseau, 2002. "Mergers as Reallocation," NBER Working Papers 9279, National Bureau of Economic Research, Inc.
  7. Michele Boldrin & David K. Levine, 2002. "Factor saving innovation," Staff Report 301, Federal Reserve Bank of Minneapolis.
  8. 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.
  9. Diego Comin & Bart Hobiijn, 2006. "An Exploration of Technology Diffusion," NBER Working Papers 12314, National Bureau of Economic Research, Inc.
  10. Michael Gort & Jeremy Greenwood & Peter Rupert, 1998. "Measuring the rate of technological progress in structures," Working Paper 9806, Federal Reserve Bank of Cleveland.
  11. Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August.
  12. 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.
  13. Jovanovic, B. & Nyarko, Y., 1996. "Learning by Doing and the Choice of Technology," Working Papers 96-25, C.V. Starr Center for Applied Economics, New York University.
  14. Aruga, Osamu, 2007. "Conventional or New? Optimal Investment Allocation across Vintages of Technology," MPRA Paper 6043, University Library of Munich, Germany.
  15. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis.
  16. repec:fth:starer:9816 is not listed on IDEAS
  17. Jovanovic, B., 1998. "Vintage Capital and Equality," Working Papers 98-16, C.V. Starr Center for Applied Economics, New York University.
  18. Michele Boldrin & David K. Levine, 2000. "Growth cycles and market crashes," Staff Report 279, Federal Reserve Bank of Minneapolis.
  19. Hyeok Jeong & Yong Kim, 2006. "Complementarity and Transition to Modern Economic Growth," IEPR Working Papers 06.44, Institute of Economic Policy Research (IEPR).
  20. Matthias Kredler, 2010. "Experience vs. Obsolescence: A Vintage-Human-Capital Model," 2010 Meeting Papers 369, Society for Economic Dynamics.
  21. Evsey D. Domar, 1963. "Total Productivity and the Quality of Capital," Journal of Political Economy, University of Chicago Press, vol. 71, pages 586.
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