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The Allocation of Investment across Vintages of Technology

Aruga, Osamu (2009): The Allocation of Investment across Vintages of Technology.

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Abstract

This paper proposes a new mechanism that explains continued investment in older-vintage technology which rests on complementarity between long-lived and short-lived vintage-specific capital. The main result is a threshold condition that relates the rate of vintage-specific technological progress (ˆq) to two investment patterns: if ˆq is above the threshold, all investment is allocated to the newest-vintage technology; otherwise, firms direct part of their investment to older-vintage technologies. The evidence supports our model's empirically testable implications: as ˆq declines, investment is allocated more toward older-vintage technology; and equipment-price changes depend on capital's heterogeneous rates of depreciation.

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