Capital Replacement and Innovation Dynamics

Fabio Bertolotti and Andrea Lanteri

No 18869, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze the role of endogenous capital-embodied innovation for macroeconomic dynamics. We provide empirical evidence that new-product introduction by capital-goods producers is an engine of long-run technological progress, but drops during recessions, when investment demand is weak. We then develop a model of investment with heterogeneous firms and endogenous capital-embodied innovation. The model features two endogenous state variables: (i) the cross-sectional distribution of firms and (ii) the quality of new capital. The fraction of firms replacing their capital determines the incentives for embodied innovations through a market-size effect. In turn, growth in new-capital quality induces firms to replace their old capital. This feedback provides a propagation mechanism for macroeconomic shocks and generates fluctuations in productivity, also in the presence of general-equilibrium forces. We analyze efficiency in the model and then show that capital-replacement subsidies have stronger short-run stimulus effects than innovation subsidies, but are less desirable in the long run.

Keywords: investment; Capital-embodied technological change; Heterogeneous firms (search for similar items in EconPapers)
JEL-codes: E22 O33 (search for similar items in EconPapers)
Date: 2024-02
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