Maintenance and investment: complements or substitutes? A reappraisal

Raouf Boucekkine (), Giorgio Fabbri () and Fausto Gozzi

Working Papers from Department of Economics, University of Glasgow

Abstract: A benchmark AK optimal growth model with maintenance expenditures and endogenous utilization of capital is considered within an explicit vin- tage capital framework. Scrapping is endogenous, and the model allows for a clean distinction between age and usage dependent capital deprecia- tion and obsolescence. It is also shown that in this set-up past investment profile completely determines the size of current maintenance expendi- tures. Among other findings, a closed-form solution to optimal dynam- ics is provided taking advantage of very recent development in optimal control of infinite dimensional systems. More importantly, and in con- trast to the pre-existing literature, we study investment and maintenance co-movements without any postulated ad-hoc depreciation function. In particular, we find that optimal investment and maintenance do move to- gether in the short-run in response to neutral technological shocks, which seems to be more consistent with the data.

Keywords: Maintenance; investment; optimal control; dynamic program- ming; infinite dimensional problem (search for similar items in EconPapers)
JEL-codes: E22 E32 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2009-04
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Working Paper: Maintenance and investment: Complements or Substitutes ? A Reappraisal (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:gla:glaewp:2009_21

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