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Rental Rate and the Dynamics of Capital

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  • Tamara Todorova

Abstract

Rental rate gives the opportunity cost of a machine, that is, it accounts for the opportunities forgone by using the machine or self-renting it instead of renting it out to someone else. While the traditional approach studies how the rate at which a machine can be rented depends on the market price of that machine, it is interesting to trace the time path of the price of capital in relation to a given expected rental rate. When the rental rate is relatively stable and firms do not expect it to change with time the intertemporal equilibrium market price of the machine is the initial price. When market participants expect the rental rate to increase, the price of the machine can increase or decrease exponentially depending on the initial price level. Given that rental rate is expected to fall, the market price of capital will grow exponentially.

Suggested Citation

  • Tamara Todorova, 2006. "Rental Rate and the Dynamics of Capital," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 58-68.
    • Handle: RePEc:bas:econst:y:2006:i:3:p:58-68
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    References listed on IDEAS

    as
    1. Cheung, Steven N S, 1969. "Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 23-42, April.
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    3. Cheung, Steven N S, 1974. "A Theory of Price Control," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 53-71, April.
    4. Cheung, Steven N S, 1983. "The Contractual Nature of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(1), pages 1-21, April.
    5. Cheung, Steven N S, 1970. "The Structure of a Contract and the Theory of a Non-exclusive Resource," Journal of Law and Economics, University of Chicago Press, vol. 13(1), pages 49-70, April.
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    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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