Irreversible Investment with Embodied Technological Progress

Bruno Cruz and Aude Pommeret ()

No 167, Discussion Papers from Instituto de Pesquisa Econômica Aplicada - IPEA

Abstract: In this paper, we propose to explain capital accumulation in a stochastic framework by taking into account the two main motives for investment. Specifically, firms invest to expand capacity and to replace old machines. The model considers irreversible investment under uncertainty and embodied technological progress. It is shown to be consistent with the following empirical observations: Investment is lumpy and infrequent at the firm level; firms can invest even if they have not reached full capacity and technological progress is largely investment specific. We extend the paper of Pindyck (1988), by introducing embodied technological progress. To produce firms use irreversible capital, perfectly flexible labor, and energy whose price is stochastic. Capital and energy are complementary. We show that uncertainty makes firms to postpone investment, increasing the age of the oldest machine and reducing the proportion of new machines in the total stock of capital. We provide an exercise with tax credit to acquire new machines; it is shown that under the hypothesis of embodiment and uncertainty, the tax credit is not effective. Implicitamente, nas teorias de investimento assume-se que as firmas devam utilizar toda capacidade instalada para investir. Entretanto, tal predição é inconsistente com a observação empírica. O objetivo deste trabalho é o de estender a literatura de investimento irreversível sob incerteza, tornando-a consistente com tal fato, além de duas outras constatações empíricas: O progresso tecnológico incorporado em novas máquinas, a infrequência e a os picos de investimento em nível micro. Além de ser consistente com tais evidências empíricas, a reposição de novas máquinas é adiada pelo aumento da incerteza. Mostra-se ainda que se o progresso tecnológico incorporado e incerteza são consideradas no modelo, a concessão de créditos tributários é ineficaz para estimular o investimento.

Pages: 52 pages
Date: 2015-01
New Economics Papers: this item is included in nep-ene
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Related works:
Working Paper: Irreversible Investment With Embodied Technological Progress (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ipe:ipetds:0167

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