When should firms invest in old capital?

Boyan Jovanovic

    Research output: Contribution to journalArticle

    Abstract

    The present paper analyzes 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. Other studies do not tell us when investment in old capital will take place. In the present 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. However, other parameters such as the rates of technological progress and depreciation matter as well.

    Original languageEnglish (US)
    Pages (from-to)107-123
    Number of pages17
    JournalInternational Journal of Economic Theory
    Volume5
    Issue number1
    DOIs
    StatePublished - Dec 1 2009

    Keywords

    • Complementarity
    • Obsolescence
    • Physical depreciation
    • Vintage capital

    ASJC Scopus subject areas

    • Economics and Econometrics

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