Working Paper: NBER ID: w14000
Authors: Boyan Jovanovic
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.
Keywords: No keywords provided
JEL Codes: D21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elasticity of substitution between old and new capital (D24) | investment in old capital (E22) |
| high depreciation of capital (E22) | investment in old capital (E22) |
| high depreciation of capital (E22) | increased investment in old vintages (G31) |
| low technological progress (O39) | investment in older vintages (G11) |
| low elasticity of substitution, high depreciation, low technological progress, and high returns to scale (D24) | investment in old capital is more likely (E22) |