When Should Firms Invest in Old Capital?

Boyan Jovanovic

NBER Working Paper No. 14000
Issued in May 2008
NBER Program(s):   PR   TWP   EFG

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.

(285 K)

Published: 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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