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When Should Firms Invest in Old Capital?

  • Boyan Jovanovic

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14000.

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Date of creation: May 2008
Date of revision:
Publication status: published as Boyan Jovanovic, 2009. "When should firms invest in old capital?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 107-123.
Handle: RePEc:nbr:nberwo:14000
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  1. Boyan Jovanovic & Peter L. Rousseau, 2008. "Mergers as Reallocation," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 765-776, November.
  2. Jovanovic, B. & Nyarko, Y., 1996. "Learning by Doing and the Choice of Technology," Working Papers 96-25, C.V. Starr Center for Applied Economics, New York University.
  3. Matthias Kredler, 2010. "Experience vs. Obsolescence: A Vintage-Human-Capital Model," 2010 Meeting Papers 369, Society for Economic Dynamics.
  4. Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August.
  5. Diego Comin & Bart Hobijn, 2010. "An Exploration of Technology Diffusion," American Economic Review, American Economic Association, vol. 100(5), pages 2031-59, December.
  6. Boldrin, Michele & Levine, David K., 2001. "Growth Cycles and Market Crashes," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 13-39, January.
  7. Koeniger Winfried & Licandro Omar, 2006. "On the Use of Substitutability as a Measure of Competition," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-9, March.
  8. 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.
  9. Michele Boldrin & David K. Levine, 2002. "Factor saving innovation," Staff Report 301, Federal Reserve Bank of Minneapolis.
  10. Comin, D. & Hobijn, B., 2003. "Cross-Country Technology Adoption: Making the Theories Face the Facts," Working Papers 03-04, C.V. Starr Center for Applied Economics, New York University.
  11. repec:fth:starer:9816 is not listed on IDEAS
  12. Gort, M. & Greenwood, J. & Rupert, P., 1998. "Measuring the Rate of Technological Progress in Structures," RCER Working Papers 457, University of Rochester - Center for Economic Research (RCER).
  13. repec:fth:starer:98-16 is not listed on IDEAS
  14. Aruga, Osamu, 2007. "Conventional or New? Optimal Investment Allocation across Vintages of Technology," MPRA Paper 6043, University Library of Munich, Germany.
  15. Evsey D. Domar, 1963. "Total Productivity and the Quality of Capital," Journal of Political Economy, University of Chicago Press, vol. 71, pages 586.
  16. Hyeok Jeong & Yong Kim, 2006. "Complementarity and Transition to Modern Economic Growth," IEPR Working Papers 06.44, Institute of Economic Policy Research (IEPR).
  17. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
  18. Dmitriy Stolyarov, 2002. "Turnover of Used Durables in a Stationary Equilibrium: Are Older Goods Traded More?," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1390-1413, December.
  19. repec:fda:fdaddt:2006-10 is not listed on IDEAS
  20. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
  21. Boyan Jovanovic, 1998. "Vintage Capital and Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 497-530, April.
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