When Should Firms Invest in Old Capital?
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.
I thank Jess Benhabib, Michele Boldrin, Bart Hobijn, Hyeok Jeong, Matthias Kredler, Omar Licandro, Dmitriy Stolyarov, Gianluca Violante, and especially Jeremy Greenwood for comments and the NSF and the Marion Ewing Kauffman Foundation for support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
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. citation courtesy of