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Capital Maintenance and Investment: Complements or Substitutes?

Author

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  • Raouf Boucekkine

    (IRES and CORE, Department of Economics, Catholic University of Louvain, Place Montesquieu, 3, B-1348 Louvain-la-Neuve, Belgium (e-mail: boucekkine@ires.ucl.ac.be))

  • Ramón Ruiz-Tamarit

    (Faculty of Economics, University of Valencia, Av. dels Tarongers, S/N°, E-46022 Valencia, Spain (e-mail: ramon.ruiz@uv.es))

Abstract

This paper studies the properties of demand for capital maintenance services and its interaction with investment under variable capital utilization rate and adjustment costs. The depreciation rate varies with the maintenance effort and the utilization rate of capital. We show that the properties of the demand functions for maintenance services and capital goods depend closely on the sign of the cross derivative of the depreciation function, i.e., on whether the marginal efficiency of maintenance decreases or increases when the rate of capital utilization rises. In our model, it is impossible to reconcile some unquestionable empirical facts and some minimal regularity conditions on the demand function for maintenance services if this cross derivative is positive. In all cases, investment and maintenance are gross complements.

Suggested Citation

  • Raouf Boucekkine & Ramón Ruiz-Tamarit, 2003. "Capital Maintenance and Investment: Complements or Substitutes?," Journal of Economics, Springer, vol. 78(1), pages 1-28, January.
  • Handle: RePEc:kap:jeczfn:v:78:y:2003:i:1:d:10.1007_s00712-002-0554-9
    DOI: 10.1007/s00712-002-0554-9
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    Cited by:

    1. Escribá-Pérez, F.J. & Murgui-García, M.J. & Ruiz-Tamarit, J.R., 2018. "Economic and statistical measurement of physical capital: From theory to practice," Economic Modelling, Elsevier, vol. 75(C), pages 246-255.
    2. Martial Dupaigne, 2007. "Les variations choisies de l'utilisation du capital : une revue des implications macroéconomiques," Revue d'économie politique, Dalloz, vol. 117(2), pages 161-196.
    3. George Bitros & Elias Flytzanis, 2004. "Utilization and Maintenance in a Model with Terminal Scrapping," Macroeconomics 0411016, University Library of Munich, Germany.
    4. Albonico, Alice & Kalyvitis, Sarantis & Pappa, Evi, 2014. "Capital maintenance and depreciation over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 273-286.
    5. Raouf, BOUCEKKINE & Blanca, MARTINEZ & Cagri, SAGLAM, 2006. "Capital Maintenance Vs Technology Adopton under Embodied Technical Progress," Discussion Papers (ECON - Département des Sciences Economiques) 2006030, Université catholique de Louvain, Département des Sciences Economiques.
    6. Raouf Boucekkine & Fernando del Río & Blanca Martínez, 2009. "Technological progress, obsolescence, and depreciation," Oxford Economic Papers, Oxford University Press, vol. 61(3), pages 440-466, July.
    7. J. Aznar-Márquez & J. R. Ruiz-Tamarit, "undated". "Endogenous Growth, Capital Utilization and Depreciation," Working Papers 2004-21, FEDEA.
    8. Boucekkine, R. & Fabbri, G. & Gozzi, F., 2010. "Maintenance and investment: Complements or substitutes? A reappraisal," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2420-2439, December.
    9. F. J. Escribá-Pérez & M. J. Murgui-García & J. R. Ruiz-Tamarit, 2019. "Capital Stock and Depreciation: Theory and an Empirical Application," LIDAM Discussion Papers IRES 2019004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    10. Belousova, Irina, 2017. "The role of endogenous capital depreciation rate in Dynamic Stochastic General Equilibrium models: Evidence from Canada," MPRA Paper 102036, University Library of Munich, Germany.
    11. Deli, Yota D., 2016. "Endogenous capital depreciation and technology shocks," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 318-338.
    12. George Bitros, 2010. "The theorem of proportionality in contemporary capital theory: An assessment of its conceptual foundations," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(4), pages 367-401, December.
    13. F. J. Escribá-Pérez & M. J. Murgui-García & J. R. Ruiz-Tamarit, 2017. "Economic and Statistical Measurement of Physical Capital with an Application to the Spanish Economy," LIDAM Discussion Papers IRES 2017020, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    14. Blanca MARTINEZ, 2002. "Technological convergence and the connections between adoption, maintenance and investment activities," LIDAM Discussion Papers IRES 2002025, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    15. Raouf Boucekkine & Blanca Martinez & Cagri Saglam, 2010. "Capital Maintenance As A Key Development Tool," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(5), pages 547-567, November.
    16. Raouf Boucekkine & Blanca Martínez & Fernando del Río, 2005. "Technological Progress And Depreciation," Working Papers. Serie AD 2005-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    17. Cagri Saglam & Vladimir M. Veliov, 2008. "Role of Endogenous Vintage Specific Depreciation in the Optimal Behavior of Firms," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(3), pages 381-410, September.
    18. Alice Albonico & Sarantis Kalyvitis & Evi Pappa, 2011. "Real Business Cycles with Capital Maintenance," Quaderni di Dipartimento 147, University of Pavia, Department of Economics and Quantitative Methods.

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    More about this item

    Keywords

    Keywords: investment theory; demand for maintenance services; capacity utilization; substitution vs complementarity.;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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