When Should Firms Invest in Old Capital?

No 14000, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies 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. In this 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. But other parameters such as the rates of technological progress and depreciation matter as well.

JEL-codes: D21 (search for similar items in EconPapers)
Date: 2008-05
New Economics Papers: this item is included in nep-bec and nep-dev
Note: PR TWP EFG
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Published as Boyan Jovanovic, 2009. "When should firms invest in old capital?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 107-123.

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Journal Article: When should firms invest in old capital? (2009)
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