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 - 2009

    Fingerprint

    Depreciation
    Investment policy
    Elasticity of substitution
    Technological progress
    Vintage capital
    Optimal investment
    Production function

    Keywords

    • Complementarity
    • Obsolescence
    • Physical depreciation
    • Vintage capital

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    When should firms invest in old capital? / Jovanovic, Boyan.

    In: International Journal of Economic Theory, Vol. 5, No. 1, 2009, p. 107-123.

    Research output: Contribution to journalArticle

    Jovanovic, Boyan. / When should firms invest in old capital?. In: International Journal of Economic Theory. 2009 ; Vol. 5, No. 1. pp. 107-123.
    @article{5e9b37e8169349319da469672bb1a280,
    title = "When should firms invest in old capital?",
    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.",
    keywords = "Complementarity, Obsolescence, Physical depreciation, Vintage capital",
    author = "Boyan Jovanovic",
    year = "2009",
    doi = "10.1111/j.1742-7363.2008.00096.x",
    language = "English (US)",
    volume = "5",
    pages = "107--123",
    journal = "International Journal of Economic Theory",
    issn = "1742-7355",
    publisher = "Wiley-Blackwell",
    number = "1",

    }

    TY - JOUR

    T1 - When should firms invest in old capital?

    AU - Jovanovic, Boyan

    PY - 2009

    Y1 - 2009

    N2 - 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.

    AB - 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.

    KW - Complementarity

    KW - Obsolescence

    KW - Physical depreciation

    KW - Vintage capital

    UR - http://www.scopus.com/inward/record.url?scp=77957266899&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=77957266899&partnerID=8YFLogxK

    U2 - 10.1111/j.1742-7363.2008.00096.x

    DO - 10.1111/j.1742-7363.2008.00096.x

    M3 - Article

    AN - SCOPUS:77957266899

    VL - 5

    SP - 107

    EP - 123

    JO - International Journal of Economic Theory

    JF - International Journal of Economic Theory

    SN - 1742-7355

    IS - 1

    ER -