Investment, Depreciation, and Capital Utilization

Abstract

The purpose of this paper is to analyze the determinants of capital durability and utilization and their interdependence with investment decisions. The approach is based on the view that the flow of undepreciated capital is an output to be used in future production. At each date capital and non-capital inputs are combined to produce current output and the capital inputs to be used for future production. Thus capital accumulation occurs in a joint product context as two kinds of output are produced, one type for current sale and one type for future production. Another issue investigated in this paper concerns the allocation of resources within a firm between installing and utilizing capital and labor training activities. Often this problem is ignored in the theory of investment, not only because depreciation is exogenous, but also due to the treatment of labor as a variable factor of production. However, it is well recognized that firms cannot costlessly adjust labor. Thus the second purpose of this paper is to analyze the intertemporal relationship between the durability of capital and the growth rate of labor.