Does it always pay to install high-quality capital? Or could it possibly be more profitable to make investments that do not last too long? In this Paper we ponder the optimal rate of depreciation of physical capital, first in the Solow model and then in a model of endogenous growth with learning-by-doing. Optimal durability and depreciation, including obsolescence, are attained when the marginal benefit of increasing durability – and thus reducing the need for future replacement investment – is equal to the marginal cost, which is the additional cost of investing due to the higher quality of capital. The optimality conditions are set out as golden rules for the quality, or durability, of capital. They entail that the higher the rate of population growth or technological progress, the larger the marginal cost of investing in durability and the lower the optimal level of durability; hence, the higher the optimal rate of depreciation. We then use a customer-market model to derive the privately optimal level of durability, and find that there is nothing in the model that ensures the socially optimal level of durability and depreciation.
|Date of creation:||Jun 2001|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Levine, Ross & Renelt, David, 1992.
"A Sensitivity Analysis of Cross-Country Growth Regressions,"
American Economic Review,
American Economic Association, vol. 82(4), pages 942-63, September.
- Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
- Gylfason, Thorvaldur & Zoega, Gylfi, 2001.
"Natural Resources and Economic Growth: The Role of Investment,"
CEPR Discussion Papers
2743, C.E.P.R. Discussion Papers.
- Thorvaldur Gylfason & Gylfi Zoega, 2006. "Natural Resources and Economic Growth: The Role of Investment," The World Economy, Wiley Blackwell, vol. 29(8), pages 1091-1115, 08.
- Thorvaldur Gylfason & Gylfi Zoega, 2002. "Natural Resources And Economic Growth: The Role Of Investment," Working Papers Central Bank of Chile 142, Central Bank of Chile.
- Thorvaldur Gylfason & Gylfi Zoega, 2001. "Natural Resources and Economic Growth: The Role of Investment," EPRU Working Paper Series 01-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Thorvaldur Gylfason & Gylfi Zoega, 2004. "Natural Resources and Economic Growth: The Role of Investment," DEGIT Conference Papers c009_011, DEGIT, Dynamics, Economic Growth, and International Trade.
- Olivier J. Blanchard, 1984.
"Debt, Deficits and Finite Horizons,"
NBER Working Papers
1389, National Bureau of Economic Research, Inc.
- Paul M Romer, 1999.
"Increasing Returns and Long-Run Growth,"
Levine's Working Paper Archive
2232, David K. Levine.
- Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000.
"Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach,"
NBER Working Papers
7750, National Bureau of Economic Research, Inc.
- Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
- Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (Bace) Approach," OECD Economics Department Working Papers 266, OECD Publishing.
- World Bank, 2000. "World Development Indicators 2000," World Bank Publications, The World Bank, number 13828, November.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2833. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.