Obsolescence of Capital and Investment Spikes

40 Pages Posted: 2 Nov 2020

See all articles by Arthur Fishman

Arthur Fishman

Bar-Ilan University - Department of Economics

Boyan Jovanovic

New York University - Department of Economics

Date Written: October 2020

Abstract

The prospect of capital obsolescence inhibits investment. Investors thus become more optimistic when the obsolescence of their capital slows down. We propose a model with no fixed costs of investment, and random technological progress that induces obsolescence of capital in place. Spikes occur precisely when technological progress slows down. Moreover, the more variable the progress, the larger are the spikes. Cross-industry data show that where price of capital declines are more variable, investment spikes are larger.

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Suggested Citation

Fishman, Arthur and Jovanovic, Boyan, Obsolescence of Capital and Investment Spikes (October 2020). NBER Working Paper No. w28017, Available at SSRN: https://ssrn.com/abstract=3723254

Arthur Fishman (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
972-3-531-8366 (Phone)
972 3 535 3180 (Fax)

Boyan Jovanovic

New York University - Department of Economics ( email )

19 w 4 st.
New York, NY 10012
United States

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