The Optimal Lifetime of Assets under Uncertainty in the Rate of Embodied Technical Change
Georgios (George) C. Bitros
Athens University of Economics and Business - Department of Economics
This paper investigates the effects of uncertainty emanating from technological improvements on the optimal lifetime of assets. In does so in a dynamic model in which: a) technological change increases continuously the productivity of producers' durables, b) potential competition induces firms to price their output in a way that passes all benefits to final consumers, and c) the mean and the variance are considered sufficient statistics to describe the probability distribution of technological change. From the analysis it turns out that in general this type of uncertainty shortens the optimal lifetime of assets. More specifically, the analysis shows that: replacement under uncertainty leads to optimal lifetimes of assets that are shorter than in any other mode of operation; depending on the mean rate of technological progress, m, and the price elasticity of demand, n, scrapping under uncertainty yields life-times that may be shorter or longer than those determined by replacement under certainty; and, irrespective of the values of these parameters, the optimal lifetime of assets from a policy of scrapping under uncertainty is always shorter than that from scrapping under certainty. However, the robustness of these results under alternative specifications of the probability distribution of technological change remains an open question.
Number of Pages in PDF File: 19
Keywords: service life, replacement, scrapping, embodied technical change, uncertainty
JEL Classification: D81, E22, O22, O33working papers series
Date posted: February 21, 2007
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