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Operating policies in a model with terminal scrapping

Listed author(s):
  • George C. Bitros

    (Athens University of Economics & Business)

  • Elias Flytzanis

    (Athens University of Economics & Business)

We draw on three strands of literature dealing with utilization, maintenance, and scrapping in order to analyze the properties of the respective policies and their interac-tions. We do so by focusing on the last period of the received multi-period service life model and extending it in three directions: first, by associating the physical deteriora-tion of equipment to the intensity of its utilization and maintenance; second, by ex-panding on the range of explainable operating policies to allow for idling, mothballing, capacity depleting, capacity preserving, full capacity, upgrading, and downgrading; and, third, by linking the operating policies to the capital policy of scrapping. Owing to these enhancements, the analysis leads to several important findings. One among them is that optimal operating policies behave usually in opposite directions, proceed-ing in time from harder to softer or vice versa, depending on the net revenue earning capability of the equipment under consideration. Another is that profit (loss) making equipment is scrappable iff on the average the operating capital deteriorates faster (slower), or equivalently improves slower (faster), than the scrapping capital. And still an-other result is that operating policies are determined jointly with scrapping policy capi-tal policies, thus suggesting that empirical investigations of their determinants should allow for this simultaneity.

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Paper provided by EconWPA in its series Macroeconomics with number 0411008.

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Length: 10 pages
Date of creation: 11 Nov 2004
Handle: RePEc:wpa:wuwpma:0411008
Note: Type of Document - pdf; pages: 10
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