The role of endogenous vintage specific depreciation on the optimal behavior of firms

Abstract

This paper studies the firms' capital accumulation process in a vintage capital model with embodied technological change. We take into account that depreciation is endogenous and in particular associated with vintage specific maintenance expenditure. We prove that maintenance is a local substitute for investment as soon as the marginal cost of maintenance is strictly increasing. We show that maintenance and investment in new capital goods appear as complements with respect to the changes in productivity, cost of maintenance, fixed cost of operation, efficiency of maintenance services and appear as substitutes with respect to the price of new machines. Allowing for investment in old vintages, we determine that investment in old machines appears as a substitute of both investments in new machines and maintenance services. We end up by analyzing the effects of technological progress on optimal plans and prove that a negative anticipation effect can occur even without any market imperfections.