Operating policies in a model with terminal scrapping

George C. Bitros () and Elias Flytzanis
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Elias Flytzanis: Athens University of Economics & Business

Macroeconomics from EconWPA

Abstract: We draw on three strands of literature dealing with utilization, maintenance, and scrapping in order to analyze the properties of the respective policies and their interac-tions. We do so by focusing on the last period of the received multi-period service life model and extending it in three directions: first, by associating the physical deteriora-tion of equipment to the intensity of its utilization and maintenance; second, by ex-panding on the range of explainable operating policies to allow for idling, mothballing, capacity depleting, capacity preserving, full capacity, upgrading, and downgrading; and, third, by linking the operating policies to the capital policy of scrapping. Owing to these enhancements, the analysis leads to several important findings. One among them is that optimal operating policies behave usually in opposite directions, proceed-ing in time from harder to softer or vice versa, depending on the net revenue earning capability of the equipment under consideration. Another is that profit (loss) making equipment is scrappable iff on the average the operating capital deteriorates faster (slower), or equivalently improves slower (faster), than the scrapping capital. And still an-other result is that operating policies are determined jointly with scrapping policy capi-tal policies, thus suggesting that empirical investigations of their determinants should allow for this simultaneity.

Keywords: Utilization; maintenance; idling; mothballing; capacity depleting; capacity pre-serving; upgrading; downgrading; scrapping. (search for similar items in EconPapers)
JEL-codes: E22 E32 O16 (search for similar items in EconPapers)
Date: 2004-11-11
Note: Type of Document - pdf; pages: 10

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