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Obsolescence of Capital and Investment Spikes

Author

Listed:
  • Arthur Fishman
  • Boyan Jovanovic
Abstract
The prospect of capital obsolescence inhibits investment. Investors thus become more optimistic when the obsolescence of their capital slows down. We propose a model with no fixed costs of investment, and random technological progress that induces obsolescence of capital in place. Spikes occur precisely when technological progress slows down. Moreover, the more variable the progress, the larger are the spikes. Cross-industry data show that where price of capital declines are more variable, investment spikes are larger.

Suggested Citation

  • Arthur Fishman & Boyan Jovanovic, 2021. "Obsolescence of Capital and Investment Spikes," American Economic Journal: Microeconomics, American Economic Association, vol. 13(4), pages 135-171, November.
    • Handle: RePEc:aea:aejmic:v:13:y:2021:i:4:p:135-71
    DOI: 10.1257/mic.20190062
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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