Machine Replacement, Technology Adoption and Convergence

Abstract

In this paper, we introduce adoption costs in a canonical vintage capital model. Adoption costs take the form of a direct loss in production during a fixed period of time. We explicitly characterize the optimal machine replacement policy as a function of the adoption period. Using an explicit numerical method, we study the dynamics of the model. In particular, we find that while an increase in the adoption costs lowers the long run level of output, it also rises the magnitude of short run fluctuations and decreases the convergence speed to the steady states.

JEL Classification: E22, E32, O40, C63