Obsolescence of Capital and Investment Spikes
40 Pages Posted: 2 Nov 2020 Last revised: 21 Jul 2024
Date Written: October 2020
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.
Suggested Citation: Suggested Citation
Fishman, Arthur and Jovanovic, Boyan, Obsolescence of Capital and Investment Spikes (October 2020). NBER Working Paper No. w28017, Available at SSRN: https://ssrn.com/abstract=3723254
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