Obsolescence of Capital and Investment Spikes

Abstract

The prospect of capital obsolescence inhibits investment. Investors thus become more optimistic when the obsolescence of their capital slows down. We propose a model with no fixed costs of investment, and random technological progress that induces obsolescence of capital in place. Spikes occur precisely when technological progress slows down. Moreover, the more variable the progress, the larger are the spikes. Cross-industry data show that where price of capital declines are more variable, investment spikes are larger.