Conventional or New? Optimal Investment Allocation across Vintages of Technology

Osamu Aruga

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops and analyzes a growth model that consists of complementary long-lived and short-lived vintage-specific capital. As a result of the existence of complementary capital that is vintage compatible but has different longevity, the model generates two distinct investment patterns: (i) if the rate of vintage-specific technological progress is above a threshold–which is the product of long-lived capital’s share and the difference in the rates of depreciation–then all new investment is allocated to the capital that embodies the frontier technology; (ii) otherwise, some investment is allocated to obsolete, short-lived capital to exploit the existing stock of obsolete long-lived capital. The result provides a new explanation for observed investment in obsolete technologies. An important implication of this result is that equipment price-changes do not necessarily reflect the rate of progress, since the prices of obsolete short-lived capital remain the same when the rate of the progress is slow enough (as mentioned in (ii) above). Another implication is that acceleration in the rate of vintage-specific technological progress can cause an abrupt reallocation of investment towards modern capital–consistent with investment booms that are concentrated in certain “high-tech” equipment.

Keywords: Vintage Capital; Intangible Capital; Capital Heterogeneity; Pricing of Capital Goods; Maintenance and Repair (search for similar items in EconPapers)
JEL-codes: E22 O3 O4 (search for similar items in EconPapers)
Date: 2007-11-23
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://mpra.ub.uni-muenchen.de/6043/1/MPRA_paper_6043.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/18129/4/MPRA_paper_18129.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/18634/1/MPRA_paper_18634.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/21884/2/MPRA_paper_21884.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/28877/1/MPRA_paper_28877.pdf revised version (application/pdf)

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