The Business Cycle, Financial Performance, and the Retirement of Capital Goods

Austan Goolsbee

NBER Working Paper No. 6392
Issued in February 1998
NBER Program(s):Economic Fluctuations and Growth

The neoclassical investment literature assumes that capital is homogenous, lives forever and has a constant depreciation rate. More recent theories of investment have shown that when there are distinct capital vintages with embodied technologies, depreciation and capital retirement become economic decisions and this raises important problems with existing empirical work. Direct testing of these issues, however, has been rare because of the lack of micro data. This paper uses new data on the service lives of individual capital goods in the airline industry to empirically examine the impact that economic factors have on capital retirement. The results strongly support the view that retirement is fundamentally an economic decision. Retirement is much more likely in recessions, when the cost of capital is low, or when a firm has good financial performance. Factor prices and industry regulation are also important. Since many of these factors also influence capital expenditures, the results imply that estimates from the conventional investment literature such as the effect of the cost of capital or financial performance may substantially overstate the case since their impact on net investment may be much more modest than their impact on gross investment. The results also have implications for the measurement of productivity.

download in pdf format
   (1220 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6392

Published: Review of Economic Dynamics, Vol. 1, no. 2 (April 1998): 474-496. citation courtesy of

Users who downloaded this paper also downloaded* these:
Jorgenson The Theory of Investment Behavior
Shen, Eggleston, Lau, and Schmid w11662 Hospital Ownership and Financial Performance: A Quantitative Research Review
Bernanke and Gertler w2318 Financial Fragility and Economic Performance
Borenstein and Rose How Airline Markets Work…or Do They? Regulatory Reform in the Airline Industry
Joskow and Noll Regulation in Theory and Practice: An Overview
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us