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Optimal Growth under Endogeneous Depreciation, Capital Utilization and Maintenance Costs

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Abstract

This paper analyzes the equilibrium dynamics of an optimal growth model that incorporates endogenous depreciation, variable capital utilization, and expenditures on the maintenance of physical capital. Maintenance acts as a substitute for investment, since it reduces the depreciation of capital. Investment is subject to adjustment costs, and capital is not fully utilized, the degree of capital utilization affecting the activity of maintaining. We establish a set of sufficient conditions for the existence and uniqueness of a steady state equilibrium. Also, we define a “delta golden rule” consistent with the proposed economic environment and we analyze the dynamic efficiency of this economy. Finally, the steady state is found locally saddle-path stable. These results provide a framework for the analysis of comparative dynamics in general equilibrium with these features.

Suggested Citation

  • Omar Licandro & Luis A. Puch González & J. Ramón Ruiz Tamaritz, 2001. "Optimal Growth under Endogeneous Depreciation, Capital Utilization and Maintenance Costs," Documentos de Trabajo del ICAE 0101, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    • Handle: RePEc:ucm:doicae:0101
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    1. Ruiz-Tamarit, José Ramon, 1995. "Dépréciation endogène et sous-utilisation du capital," LIDAM Discussion Papers IRES 1995026, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Ellen R. McGrattan & James A. Schmitz, 1999. "Maintenance and repair: too big to ignore," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Fall), pages 2-13.
    3. M. Kurz, 1971. "The General Instability of a Class of Competitive Growth Processes," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 17, pages 218-237, Palgrave Macmillan.
    4. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, vol. 86(5), pages 1154-1174, December.
    5. Omar Licandro & Luis A. Puch, 2000. "Capital Utilization, Maintenance Costs and the Business Cycle," Annals of Economics and Statistics, GENES, issue 58, pages 143-164.
    6. Abel, Andrew B & Blanchard, Olivier J, 1983. "An Intertemporal Model of Saving and Investment," Econometrica, Econometric Society, vol. 51(3), pages 675-692, May.
    7. Hirofumi Uzawa, 1964. "Optimal Growth in a Two-Sector Model of Capital Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 31(1), pages 1-24.
    8. Motahar, Eshragh, 1992. "Endogenous capital utilization and the q theory of investment," Economics Letters, Elsevier, vol. 40(1), pages 71-75, September.
    9. Beatriz Rumbos & Leonardo Auernheimer, 2001. "Endogenous capital utilization in a neoclassical growth model," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 29(2), pages 121-134, June.
    10. Epstein, L. & Denny, M., 1980. "Endogenous capital utilization in a short-run production model : Theory and an empiral application," Journal of Econometrics, Elsevier, vol. 12(2), pages 189-207, February.
    11. repec:adr:anecst:y:2000:i:58:p:05 is not listed on IDEAS
    12. Kollintzas, Tryphon & Collard, Fabrice, 2000. "Maintenance, Utilization, and Depreciation along the Business Cycle," CEPR Discussion Papers 2477, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Martial Dupaigne, 2007. "Les variations choisies de l'utilisation du capital : une revue des implications macroéconomiques," Revue d'économie politique, Dalloz, vol. 117(2), pages 161-196.
    2. Monteiro, Goncalo & Cook, Adam & Dey, Sanjoy, 2013. "Optimal tax policy under habit formation and capital utilization," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 230-248.
    3. Sarantis Kalyvitis, 2006. "Another look at the linear q model: an empirical analysis of aggregate business capital spending with maintenance expenditures," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(4), pages 1282-1315, November.
    4. S. Devrim Yilmaz, 2008. "Public and Private Maintenance Expenditure in a Growing Economy," Centre for Growth and Business Cycle Research Discussion Paper Series 108, Economics, The University of Manchester.
    5. J. Aznar-Márquez & J. R. Ruiz-Tamarit, "undated". "Endogenous Growth, Capital Utilization and Depreciation," Working Papers 2004-21, FEDEA.
    6. Seiya Fujisaki & Kazuo Mino, 2010. "Long-Run Impacts of Inflation Tax with Endogenous Capital Depreciation," Economics Bulletin, AccessEcon, vol. 30(1), pages 808-816.
    7. Bitros, George C., 2016. "A theory of maintenance expenditures tested on automobile data from Greece," MPRA Paper 70820, University Library of Munich, Germany.
    8. George Bitros, 2010. "The theorem of proportionality in contemporary capital theory: An assessment of its conceptual foundations," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(4), pages 367-401, December.
    9. Boucekkine, R. & Fabbri, G. & Gozzi, F., 2010. "Maintenance and investment: Complements or substitutes? A reappraisal," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2420-2439, December.
    10. Dioikitopoulos, Evangelos V. & Kalyvitis, Sarantis, 2008. "Public capital maintenance and congestion: Long-run growth and fiscal policies," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3760-3779, December.
    11. Ludmila Fadejeva & Aleksejs Melihovs, 2010. "Measuring Total Factor Productivity and Variable Factor Utilization," Eastern European Economics, Taylor & Francis Journals, vol. 48(5), pages 63-101, September.
    12. Eleni Angelopoulou & Sarantis Kalyvitis, 2012. "Estimating the Euler Equation for Aggregate Investment with Endogenous Capital Depreciation," Southern Economic Journal, John Wiley & Sons, vol. 78(3), pages 1057-1078, January.
    13. Bitros, George C., 2009. "The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Conceptual Foundations," MPRA Paper 17436, University Library of Munich, Germany.
    14. Raouf, BOUCEKKINE & Blanca, MARTINEZ & Cagri, SAGLAM, 2006. "Capital Maintenance Vs Technology Adopton under Embodied Technical Progress," Discussion Papers (ECON - Département des Sciences Economiques) 2006030, Université catholique de Louvain, Département des Sciences Economiques.
    15. Belousova, Irina, 2017. "The role of endogenous capital depreciation rate in Dynamic Stochastic General Equilibrium models: Evidence from Canada," MPRA Paper 102036, University Library of Munich, Germany.

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    More about this item

    Keywords

    Maintenance; Depreciation; Capital Utilization; Optimal growth.;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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