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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. Comin, D. & Hobijn, B., 2004. "Cross-country technology adoption: making the theories face the facts," Journal of Monetary Economics, Elsevier, vol. 51(1), pages 39-83, January.
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  19. Kredler, Matthias, 2008. "Experience vs. Obsolescence: A Vintage-Human-Capital Model," MPRA Paper 10200, University Library of Munich, Germany.
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