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When Should Firms Invest in Old Capital?

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  • Boyan Jovanovic

Abstract

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.

Suggested Citation

  • Boyan Jovanovic, 2008. "When Should Firms Invest in Old Capital?," NBER Working Papers 14000, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14000
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    Cited by:

    1. Jovanovic, Boyan & Yatsenko, Yuri, 2012. "Investment in vintage capital," Journal of Economic Theory, Elsevier, vol. 147(2), pages 551-569.
    2. Kim, Myeong Hyeon & Sun, Lingxia, 2017. "Dynamic conditional correlations between Chinese sector returns and the S&P 500 index: An interpretation based on investment shocks," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 309-325.

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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