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When should firms invest in old capital?
Author(s) -
Jovanovic Boyan
Publication year - 2009
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2008.00096.x
Subject(s) - economics , depreciation (economics) , capital (architecture) , investment (military) , physical capital , monetary economics , consumption of fixed capital , fixed capital , investment function , elasticity of substitution , capital consumption allowance , production (economics) , capital intensity , microeconomics , financial capital , capital formation , market economy , human capital , archaeology , politics , political science , law , history
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.