Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/220256 
Year of Publication: 
2015
Series/Report no.: 
Discussion Paper No. 167
Publisher: 
Institute for Applied Economic Research (ipea), Brasília
Abstract: 
In this paper, we propose to explain capital accumulation in a stochastic framework by taking into account the two main motives for investment. Specifically, firms invest to expand capacity and to replace old machines. The model considers irreversible investment under uncertainty and embodied technological progress. It is shown to be consistent with the following empirical observations: Investment is lumpy and infrequent at the firm level; firms can invest even if they have not reached full capacity and technological progress is largely investment specific. We extend the paper of Pindyck (1988), by introducing embodied technological progress. To produce firms use irreversible capital, perfectly flexible labor, and energy whose price is stochastic. Capital and energy are complementary. We show that uncertainty makes firms to postpone investment, increasing the age of the oldest machine and reducing the proportion of new machines in the total stock of capital. We provide an exercise with tax credit to acquire new machines; it is shown that under the hypothesis of embodiment and uncertainty, the tax credit is not effective.
JEL: 
E22
E32
Document Type: 
Working Paper

Files in This Item:
File
Size
458.9 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.