TY  - JOUR
AU  - Goolsbee,Austan
TI  - The Business Cycle, Financial Performance, and the Retirement of Capital Goods
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6392
PY  - 1998
Y2  - February 1998
UR  - http://www.nber.org/papers/w6392
L1  - http://www.nber.org/papers/w6392.pdf
N1  - Author contact info:
Austan Goolsbee
Booth School of Business
University of Chicago
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-5869
Fax: 773/702-0458
E-Mail: goolsbee@chicagobooth.edu
AB  - 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.
ER  -