Browsing by Subject "Capital replacement"

This thesis examines the effect of investment-specific technological change on the capital replacement decision and depreciation by extending Mukoyama’s (2008) study on endogenous depreciation. When allowing investment-specific technological progress to be described either as a fall in the price of capital or as a growth in the relative productivity of new capital, and capital stock to be determined by the producer’s optimization, there arise a method to describe obsolescence as a part of depreciation and capital evolution. The following three key results are shown when assuming that scrapped capital stock has no value. First, the optimal replacement policy is stationary. Second, the acceleration of investment-specific technological progress accelerates capital replacement, hence also obsolescence. Third, whether investment-specific technological progress is modelled as a fall in the price of capital or as a growth in the relative productivity of new capital, does not impact on the optimal replacement policy. A quantitative exercise shows that the first two results seems to hold even if the scrapped capital stock has some positive value. However, if scrapped capital has some value, then the two approaches to model investment-specific technological progress are no longer equivalent. The adoption of the capital replacement problem for describing depreciation is a promising approach. Even though there does not exist a closed-from solution for the optimal replacement interval, it can be solved (in the stationary case) as a root of a relative simple transcendental function. The rate of depreciation can be explicitly solved, also in the case of non-stationary replacement policy, but that is computationally more difficult. Physical depreciation (wear and tear) can be disentangled from obsolescence insofar as either one is known. Thus, the results still rely on the estimate of physical depreciation.