Dynamic Investment Behavior Taking into Account Ageing of the Capital Good

In standard capital accumulation models all capital goods are equally productive and produce goods of the same quality.However, due to ageing, in reality it holds most of the time that newer capital goods are more productive. Implications of this feature for the firm's investment policies are investigated in an optimal control problem with distributed parameters.It turns out that investing in capital goods of di¤erent age is done such that the net present value of marginal investment equals zero.Comparing the returns of investment in capital goods of different age, the higher productivity of younger capital goods has to be weighed against the lower costs of depreciation, discounting and acquisition of older capital goods.In the steady state it holds that, in the most reasonable scenario, the firm should invest at the highest rate in new capital goods, and dis-investment can only be optimal when costs of acquisition are large and machines are old.