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The optimal lifetime of assets under uncertainty in the rate of embodied technical change

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  • Bitros, George C.

Abstract

This paper investigates the effects of uncertainty emanating from technological im-provements on the optimal lifetime of assets. In does so in a dynamic model in which: a) technological change increases continuously the productivity of producers’ durables, b) po-tential competition induces firms to price their output in a way that passes all benefits to final consumers, and c) the mean and the variance are considered sufficient statistics to describe the probability distribution of technological change. From the analysis it turns out that in general this type of uncertainty shortens the optimal lifetime of assets. More specifically, the analysis shows that: replacement under uncertainty leads to optimal lifetimes of assets that are shorter than in any other mode of operation; depending on the mean rate of technological progress, , and the price elasticity of demand, , scrapping under uncertainty yields life-times that may be shorter or longer than those determined by replacement under certainty; and, irrespective of the values of these parameters, the optimal lifetime of assets from a pol-icy of scrapping under uncertainty is always shorter than that from scrapping under cer-tainty. However, the robustness of these results under alternative specifications of the prob-ability distribution of technological change remains an open question

Suggested Citation

  • Bitros, George C., 2007. "The optimal lifetime of assets under uncertainty in the rate of embodied technical change," MPRA Paper 3620, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:3620
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    File URL: https://mpra.ub.uni-muenchen.de/3620/1/MPRA_paper_3620.pdf
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    References listed on IDEAS

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    1. Morton I. Kamien & Nancy L. Schwartz, 1971. "Optimal Maintenance and Sale Age for a Machine Subject to Failure," Management Science, INFORMS, vol. 17(8), pages 495-504, April.
    2. Georgios Bitros, 2005. "Some Novel Implications of Replacemnt and Scrapping," Macroeconomics 0504029, EconWPA.
    3. Fuss, Melvyn & McFadden, Daniel, 1978. "Production Economics: A Dual Approach to Theory and Applications (I): The Theory of Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 1, number fuss1978.
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    Citations

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    Cited by:

    1. Dimitrios Koumparoulis, 2011. "The Proportionality Hypothesis in Capital Theory: an Assessment of the Literature," EuroEconomica, Danubius University of Galati, issue 27, pages 27-39, February.
    2. Bitros, George C., 2016. "A theory of maintenance expenditures tested on automobile data from Greece," MPRA Paper 70820, University Library of Munich, Germany.
    3. George Bitros, 2010. "The theorem of proportionality in contemporary capital theory: An assessment of its conceptual foundations," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(4), pages 367-401, December.
    4. Bitros, George C., 2009. "The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Applicability," MPRA Paper 17821, University Library of Munich, Germany.
    5. George Bitros, 2008. "Why the structure of capital and the useful lives of its components matter: A test based on a model of Austrian descent," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 21(4), pages 301-328, December.
    6. Bitros, George C. & Nadiri, M. Ishaq, 2017. "Elasticities of Business Investment in the U.S. and their Policy Implications: A Disaggregate Approach to Modeling and Estimation," MPRA Paper 80091, University Library of Munich, Germany.

    More about this item

    Keywords

    service life; replacement; scrapping; embodied technical change; uncertainty;

    JEL classification:

    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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