When Should Firms Invest in Old Capital?

21 Pages Posted: 16 May 2008 Last revised: 4 Apr 2021

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Date Written: May 2008

Abstract

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.

Suggested Citation

Jovanovic, Boyan, When Should Firms Invest in Old Capital? (May 2008). NBER Working Paper No. w14000, Available at SSRN: https://ssrn.com/abstract=1133914

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

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