IDEAS home Printed from https://ideas.repec.org/a/jns/jbstat/v238y2018i3-4p295-351n4.html
   My bibliography  Save this article

Strategic Timing of Investment over the Business Cycle: Machine Replacement in the US Rental Industry

Author

Listed:
  • McClelland John

    (American Rental Association, Washington, D.C., USA)

  • Rust John

    (Georgetown University, Washington, D.C., USA)

Abstract

We analyze a data set containing rental revenues, maintenance costs, and sale prices of five different types of rental machines to econometrically estimate key relationships needed to implement a dynamic programming model of the optimal timing of replacement of rental equipment owned by a large multi-location firm in the equipment rental industry. The model reveals significant potential to improve rental company profitability by improving the strategic timing of equipment replacement. The gains from the optimal replacement strategy come from exploiting seasonal variation in rental demand and the timing of the business cycle due to their effects on rental revenues and the cost of replacement. For some machines we find the optimal replacement strategy is procyclical, but for others we find that a countercyclical replacement strategy –- where replacements are concentrated in slow periods of the business cycle –- can significantly increase firm profits.

Suggested Citation

  • McClelland John & Rust John, 2018. "Strategic Timing of Investment over the Business Cycle: Machine Replacement in the US Rental Industry," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 238(3-4), pages 295-351, July.
    • Handle: RePEc:jns:jbstat:v:238:y:2018:i:3-4:p:295-351:n:4
    DOI: 10.1515/jbnst-2018-0023
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/jbnst-2018-0023
    Download Restriction: no
    File URL: https://libkey.io/10.1515/jbnst-2018-0023?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    2. John Rust, 1997. "Using Randomization to Break the Curse of Dimensionality," Econometrica, Econometric Society, vol. 65(3), pages 487-516, May.
    3. John W. McClelland & Micheal E. Wetzstein & Richard K. Noles, 1989. "Optimal Replacement Policies for Rejuvenated Assets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(1), pages 147-157.
    4. Sungjin Cho & John Rust, 2010. "The Flat Rental Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 560-594.
    5. Paul A. Samuelson, 1937. "Some Aspects of the Pure Theory of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 51(3), pages 469-496.
    6. Paarsch, Harry J. & Rust, John, 2009. "Valuing programs with deterministic and stochastic cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 614-623, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Norets, Andriy & Shimizu, Kenichi, 2024. "Semiparametric Bayesian estimation of dynamic discrete choice models," Journal of Econometrics, Elsevier, vol. 238(2).
    2. Kristensen, Dennis & Mogensen, Patrick K. & Moon, Jong Myun & Schjerning, Bertel, 2021. "Solving dynamic discrete choice models using smoothing and sieve methods," Journal of Econometrics, Elsevier, vol. 223(2), pages 328-360.
    3. Andrew Ching & Susumu Imai & Masakazu Ishihara & Neelam Jain, 2012. "A practitioner’s guide to Bayesian estimation of discrete choice dynamic programming models," Quantitative Marketing and Economics (QME), Springer, vol. 10(2), pages 151-196, June.
    4. Ji, Yongjie & Rabotyagov, Sergey & Kling, Catherine L., 2014. "Crop Choice and Rotational Effects: A Dynamic Model of Land Use in Iowa in Recent Years," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170366, Agricultural and Applied Economics Association.
    5. Arvid Raknerud & Rolf Golombek, 2000. "Exit Dynamics with Rational Expectations," Discussion Papers 291, Statistics Norway, Research Department.
    6. Andriy Norets, 2009. "Inference in Dynamic Discrete Choice Models With Serially orrelated Unobserved State Variables," Econometrica, Econometric Society, vol. 77(5), pages 1665-1682, September.
    7. Blom Västberg, Oskar & Karlström, Anders & Jonsson, Daniel & Sundberg, Marcus, 2016. "Including time in a travel demand model using dynamic discrete choice," MPRA Paper 75336, University Library of Munich, Germany, revised 11 Nov 2016.
    8. Christian Belzil & Jörgen Hansen, 2004. "Earnings Dispersion, Risk Aversion And Education," Research in Labor Economics, in: Accounting for Worker Well-Being, pages 335-358, Emerald Group Publishing Limited.
    9. Victor Aguirregabiria & Pedro Mira, 2002. "Swapping the Nested Fixed Point Algorithm: A Class of Estimators for Discrete Markov Decision Models," Econometrica, Econometric Society, vol. 70(4), pages 1519-1543, July.
    10. Song Lin & Juanjuan Zhang & John R. Hauser, 2015. "Learning from Experience, Simply," Marketing Science, INFORMS, vol. 34(1), pages 1-19, January.
    11. Daniel Ackerberg, 2009. "A new use of importance sampling to reduce computational burden in simulation estimation," Quantitative Marketing and Economics (QME), Springer, vol. 7(4), pages 343-376, December.
    12. Weiland, Brandon & Sesmero, Juan Pablo & Preckel, Paul & Wetzstein, Michael E., 2017. "Can Wood Pellets Save Coal?," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258250, Agricultural and Applied Economics Association.
    13. Bound, John & Stinebrickner, Todd & Waidmann, Timothy, 2010. "Health, economic resources and the work decisions of older men," Journal of Econometrics, Elsevier, vol. 156(1), pages 106-129, May.
    14. Victor Aguirregabiria & Arvind Magesan, "undated". "Soultion and Estimation of Dynamic Discrete Choice Structural Models Using Euler Equations," Working Papers 2016-32, Department of Economics, University of Calgary, revised 24 May 2016.
    15. John Rust & Sungjin Cho, 2018. "Optimal Dynamic Hotel Pricing," 2018 Meeting Papers 179, Society for Economic Dynamics.
    16. Paul Sullivan, 2010. "A Dynamic Analysis Of Educational Attainment, Occupational Choices, And Job Search," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 289-317, February.
    17. Masakazu Ishihara & Andrew T. Ching, 2019. "Dynamic Demand for New and Used Durable Goods Without Physical Depreciation: The Case of Japanese Video Games," Marketing Science, INFORMS, vol. 38(3), pages 392-416, May.
    18. Keane, Michael P. & Todd, Petra E. & Wolpin, Kenneth I., 2011. "The Structural Estimation of Behavioral Models: Discrete Choice Dynamic Programming Methods and Applications," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 4, pages 331-461, Elsevier.
    19. Brett R. Gordon, 2009. "A Dynamic Model of Consumer Replacement Cycles in the PC Processor Industry," Marketing Science, INFORMS, vol. 28(5), pages 846-867, 09-10.
    20. Victor Aguirregabiria & Gustavo Vicentini, 2006. "Dynamic Spatial Competition Between Multi-Store Firms," Working Papers tecipa-253, University of Toronto, Department of Economics.

    More about this item

    Keywords

    rental equipment; rental markets; optimal replacement;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • L64 - Industrial Organization - - Industry Studies: Manufacturing - - - Other Machinery; Business Equipment; Armaments
    • L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jns:jbstat:v:238:y:2018:i:3-4:p:295-351:n:4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.