Endogeneous Depreciation in a Putty-Putty Production Model
The theory of investment has shown the existence of a well defined investment function combining both the tradition of Tobin’s q models and the adjustment costs related to investment. Nevertheless, depreciation is still determined exogenously as a constant proportion of capital stock. In this paper we analyse conditions for a well defined depreciation function. Introducing a maintenance cost function for capital in the firm’s behavior model, depreciation appears as a control variable endogenously determined by the firm.
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