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The Business Cycle, Financial Performance, and the Retirement of Capital Goods

  • Austan Goolsbee

The neoclassical investment literature assumes that capital is homogenous, lives forever and has a constant depreciation rate. More recent theories of investment have shown that when there are distinct capital vintages with embodied technologies, depreciation and capital retirement become economic decisions and this raises important problems with existing empirical work. Direct testing of these issues, however, has been rare because of the lack of micro data. This paper uses new data on the service lives of individual capital goods in the airline industry to empirically examine the impact that economic factors have on capital retirement. The results strongly support the view that retirement is fundamentally an economic decision. Retirement is much more likely in recessions, when the cost of capital is low, or when a firm has good financial performance. Factor prices and industry regulation are also important. Since many of these factors also influence capital expenditures, the results imply that estimates from the conventional investment literature such as the effect of the cost of capital or financial performance may substantially overstate the case since their impact on net investment may be much more modest than their impact on gross investment. The results also have implications for the measurement of productivity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6392.

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Date of creation: Feb 1998
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Publication status: published as Review of Economic Dynamics, Vol. 1, no. 2 (April 1998): 474-496.
Handle: RePEc:nbr:nberwo:6392
Note: EFG
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  1. Feldstein, Martin S & Foot, David K, 1971. "The Other Half of Gross Investment: Replacement and Modernization Expenditures," The Review of Economics and Statistics, MIT Press, vol. 53(1), pages 49-58, February.
  2. Austan Goolsbee, 1998. "Investment Tax Incentives, Prices, And The Supply Of Capital Goods," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 121-148, February.
  3. Cooley, Thomas F. & Greenwood, Jeremy & Yorukoglu, Mehmet, 1997. "The replacement problem," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 457-499, December.
  4. Han, Aaron & Hausman, Jerry A, 1990. "Flexible Parametric Estimation of Duration and Competing Risk Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(1), pages 1-28, January-M.
  5. Heckman, James J. & Singer, Burton, 1986. "Econometric analysis of longitudinal data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 3, chapter 29, pages 1689-1763 Elsevier.
  6. Cooper, Russell & Haltiwanger, John, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," American Economic Review, American Economic Association, vol. 83(3), pages 360-82, June.
  7. Ricardo J. Caballero & Mohamad L. Hammour, 1991. "The Cleansing Effect of Recessions," NBER Working Papers 3922, National Bureau of Economic Research, Inc.
  8. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-62, June.
  9. Sueyoshi, Glenn T., 1992. "Semiparametric proportional hazards estimation of competing risks models with time-varying covariates," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 25-58.
  10. Martin Neil Baily, 1981. "Productivity and the Services of Capital and Labor," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 1-66.
  11. Peter Klenow, 1998. "Learning Curves and the Cyclical Behavior of Manufacturing Industries," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 531-550, April.
  12. Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
  13. Boddy, Raford & Gort, Michael, 1971. "The Substitution of Capital for Capital," The Review of Economics and Statistics, MIT Press, vol. 53(2), pages 179-88, May.
  14. Feldstein, Martin S & Rothschild, Michael, 1974. "Towards an Economic Theory of Replacement Investment," Econometrica, Econometric Society, vol. 42(3), pages 393-423, May.
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