When should firms invest in old capital?

Boyan Jovanovic ()

International Journal of Economic Theory, 2009, vol. 5, issue 1, 107-123

Abstract: The present paper analyzes 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. Other studies do not tell us when investment in old capital will take place. In the present 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. However, other parameters such as the rates of technological progress and depreciation matter as well.

Date: 2009
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https://doi.org/10.1111/j.1742-7363.2008.00096.x

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Working Paper: When Should Firms Invest in Old Capital? (2008)
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