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Machine replacement, Network Externalities and Investment Cycles

  • Juan Ruiz

    (Universidad Carlos III de Madrid)

This paper presents a model where agents decide on the timing of replacement of ageing machines. The optimal replacement policy for an agent is influenced by other agents' decisions because the productivity of a particular vintage displays network externalities that set in with a lag. In equilibrium, agents follow innovation cycles with a frequency that is lower than optimal, so there is too much delay. One extreme case is the possibility of inefficient collapse: for some parameters there is no investment in equilibrium, even though it is socially optimal that agents (eventually) invest in cycles. Another feature of the model is the tendency of agents to synchronize their individual decisions, and thus the outcome of the aggregate economy does not smooth out the non- convexities present at the microeconomic level.

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File URL: http://128.118.178.162/eps/mac/papers/0302/0302001.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0302001.

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Length: 42 pages
Date of creation: 04 Feb 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0302001
Note: Type of Document - pdf file; prepared on Scientific Workplace; to print on any printer; pages: 42 ; figures: included in text
Contact details of provider: Web page: http://128.118.178.162

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  1. Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," Papers 0062, Boston University - Industry Studies Programme.
  2. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
  3. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 651-67, May.
  4. Jovanovic, Boyan & Nyarko, Yaw, 1996. "Learning by Doing and the Choice of Technology," Econometrica, Econometric Society, vol. 64(6), pages 1299-1310, November.
  5. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-90, December.
  6. Adsera, Alicia & Ray, Debraj, 1998. " History and Coordination Failure," Journal of Economic Growth, Springer, vol. 3(3), pages 267-76, September.
  7. Russell Cooper & John Haltiwanger, 1990. "Macroeconomic Implications of Production Bunching: Factor Demand Linkages," Papers 0001, Boston University - Industry Studies Programme.
  8. Gale, Douglas, 1995. "Dynamic Coordination Games," Economic Theory, Springer, vol. 5(1), pages 1-18, January.
  9. Kiminori Matsuyama, 1990. "Increasing Returns, Industrialization and Indeterminacy of Equilibrium," Discussion Papers 878, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
  11. Gale, Douglas, 1996. "Delay and Cycles," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 169-98, April.
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