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The Proportionality Hypothesis in Capital Theory: an Assessment of the Literature

  • Dimitrios Koumparoulis


    (Democritus University of Thrace, Faculty of International Economic Relations and Development)

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    It is found that the hypothesis of a constant replacement investment capital stock ratio has several fundamental shortcomings. It conflicts with most of the available theoretical and empirical evidence. It is alien to researchers in other fields of economics and related areas; and, perhaps most importantly, it has restrained progress in economic theory and econometric applications based on more realistic conceptualizations of the time structure of capital. On these grounds it is concluded that its abandonment is long overdue..

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    Article provided by Danubius University of Galati in its journal Euroeconomica.

    Volume (Year): (2011)
    Issue (Month): 27 (February)
    Pages: 27-39

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    Handle: RePEc:dug:journl:y:2011:i:27:p:27-39
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    1. Ian M. Dobbs, 2004. "Replacement Investment: Optimal Economic Life Under Uncertainty," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5-6), pages 729-757.
    2. Rust, John, 1986. "When Is It Optimal to Kill Off the Market for Used Durable Goods?," Econometrica, Econometric Society, vol. 54(1), pages 65-86, January.
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    4. Kinokuni, Hiroshi, 1999. "Repair Market Structure, Product Durability, and Monopoly," Australian Economic Papers, Wiley Blackwell, vol. 38(4), pages 343-53, December.
    5. Austan Goolsbee, 1998. "The Business Cycle, Financial Performance, and the Retirement of Capital Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 474-496, April.
    6. Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 273-283.
    7. Boersma, Jacques S.K.Th. & Stegwee, Robert A., 1996. "Exploring the issues in knowledge management," Research Report 96A09, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    8. Gerald L. Thompson, 1968. "Optimal Maintenance Policy and Sale Date of a Machine," Management Science, INFORMS, vol. 14(9), pages 543-550, May.
    9. Chatterjee, Santanu, 2005. "Capital utilization, economic growth and convergence," Journal of Economic Dynamics and Control, Elsevier, vol. 29(12), pages 2093-2124, December.
    10. Dale W. Jorgenson, 1966. "The Embodiment Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 74, pages 1.
    11. 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.
    12. Hartman, Joseph C., 2004. "Multiple asset replacement analysis under variable utilization and stochastic demand," European Journal of Operational Research, Elsevier, vol. 159(1), pages 145-165, November.
    13. 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.
    14. Bitros, George C., 2008. "Aggregation of Producer Durables with Exogenous Technical Change and Endogenous Useful lives," MPRA Paper 8243, University Library of Munich, Germany.
    15. Fraser, Jane M. & Posey, Jack W., 1989. "A framework for replacement analysis," European Journal of Operational Research, Elsevier, vol. 40(1), pages 43-57, May.
    16. Mann, Duncan P., 1992. "Durable goods monopoly and maintenance," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 65-79, March.
    17. Puch, Luis A. & Licandro, Omar, 1995. "Capital utilization: maintenance costs and the business cycle," UC3M Working papers. Economics 3917, Universidad Carlos III de Madrid. Departamento de Economía.
    18. 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.
    19. Jorgenson, Dale W., 1966. "The Embodiment Hypothesis," Scholarly Articles 3403063, Harvard University Department of Economics.
    20. Jeremy Bulow, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 729-749.
    21. 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.
    22. Malcomson, James M., 1975. "Replacement and the rental value of capital equipment subject to obsolescence," Journal of Economic Theory, Elsevier, vol. 10(1), pages 24-41, February.
    23. Barnhart, Scott W. & Miller, Edward M., 1990. "Problems in the estimation of equations containing perpetual inventory measured capital," Journal of Macroeconomics, Elsevier, vol. 12(4), pages 637-651.
    24. Parks, Richard W, 1974. "The Demand and Supply of Durable Goods and Durability," American Economic Review, American Economic Association, vol. 64(1), pages 37-55, March.
    25. John Haltiwanger & Russell Cooper, 1992. "The Aggregate Implications Of Machine Replacement: Theory And Evidence," Working Papers 92-12, Center for Economic Studies, U.S. Census Bureau.
    26. Vernon L. Smith, 1957. "Economic Equipment Policies: An Evaluation," Management Science, INFORMS, vol. 4(1), pages 20-37, October.
    27. Swan, Peter L, 1977. "Product Durability under Monopoly and Competition: Comment," Econometrica, Econometric Society, vol. 45(1), pages 229-35, January.
    28. Parks, Richard W, 1979. "Durability, Maintenance and the Price of Used Assets," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 197-217, April.
    29. Barro, Robert J., 1972. "Monopoly and Contrived Depreciation," Scholarly Articles 3451394, Harvard University Department of Economics.
    30. Nickell, Stephen, 1975. "A closer look at replacement investment," Journal of Economic Theory, Elsevier, vol. 10(1), pages 54-88, February.
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    32. 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.
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    34. Bitros, George C. & Hritonenko, Natali & Yatsenko, Yuri, 2007. "Investment, replacement and scrapping in a vintage capital model with embodied technological change," MPRA Paper 3619, University Library of Munich, Germany.
    35. Richard Schmalensee, 1974. "Market Structure, Durability, and Maintenance Effort," Review of Economic Studies, Oxford University Press, vol. 41(2), pages 277-287.
    36. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
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