Working Paper: NBER ID: w28017
Authors: 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.
Keywords: No keywords provided
JEL Codes: L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital obsolescence (E22) | investment (G31) |
| technological progress slows down (O33) | investment spikes (G31) |
| cost of capital declines (G31) | expectations of falling product prices (D41) |
| expectations of falling product prices (D41) | present value of investment (G11) |
| present value of investment (G11) | attractiveness of investment (G11) |
| higher variability in price of capital (D29) | larger spikes in investment (E22) |
| interspike hazard rises following a spike (C41) | likelihood of investment becoming profitable (G11) |