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Strategic Timing of Investment over the Business Cycle: Machine Replacement in the US Rental Industry

McClelland John () and Rust John ()
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McClelland John: American Rental Association, Washington, D.C., USA
Rust John: Georgetown University, Washington, D.C., USA

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2018, vol. 238, issue 3-4, 295-351

Abstract: We analyze a data set containing rental revenues, maintenance costs, and sale prices of five different types of rental machines to econometrically estimate key relationships needed to implement a dynamic programming model of the optimal timing of replacement of rental equipment owned by a large multi-location firm in the equipment rental industry. The model reveals significant potential to improve rental company profitability by improving the strategic timing of equipment replacement. The gains from the optimal replacement strategy come from exploiting seasonal variation in rental demand and the timing of the business cycle due to their effects on rental revenues and the cost of replacement. For some machines we find the optimal replacement strategy is procyclical, but for others we find that a countercyclical replacement strategy –- where replacements are concentrated in slow periods of the business cycle –- can significantly increase firm profits.

Keywords: rental equipment; rental markets; optimal replacement (search for similar items in EconPapers)
JEL-codes: D22 E37 L64 L74 (search for similar items in EconPapers)
Date: 2018
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