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http://ssrn.com/abstract=226140
 
 

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The Business Cycle, Financial Performance, and the Retirement of Capital Goods


Austan Goolsbee


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

February 1998

NBER Working Paper No. w6392

Abstract:     
The neoclassical investment literature assumes that capital is homogenous, lives forever and has a constant depreciation rate. More recent theories of investment have shown that when there are distinct capital vintages with embodied technologies, depreciation and capital retirement become economic decisions and this raises important problems with existing empirical work. Direct testing of these issues, however, has been rare because of the lack of micro data. This paper uses new data on the service lives of individual capital goods in the airline industry to empirically examine the impact that economic factors have on capital retirement. The results strongly support the view that retirement is fundamentally an economic decision. Retirement is much more likely in recessions, when the cost of capital is low, or when a firm has good financial performance. Factor prices and industry regulation are also important. Since many of these factors also influence capital expenditures, the results imply that estimates from the conventional investment literature such as the effect of the cost of capital or financial performance may substantially overstate the case since their impact on net investment may be much more modest than their impact on gross investment. The results also have implications for the measurement of productivity.

Number of Pages in PDF File: 35

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Date posted: June 27, 2000  

Suggested Citation

Goolsbee, Austan, The Business Cycle, Financial Performance, and the Retirement of Capital Goods (February 1998). NBER Working Paper No. w6392. Available at SSRN: http://ssrn.com/abstract=226140

Contact Information

Austan Goolsbee (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-5869 (Phone)
773-702-0458 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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