OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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Capital-embodied technological progress and obsolescence

How do they affect investment behaviour?

This paper analyses how technological progress embodied in capital goods raises productivity and income, while at the same time it can modify the allocation of consumption, investment and the capital stock. With capital-embodied technological progress, new capital goods become more productive, thus more valuable, but the production capacity of the existing capital goods declines comparatively and they become less valuable. In a dynamic and stochastic general equilibrium framework, a shock to the process of capital-embodied technological progress is shown not to raise investment as much as could be expected, allowing the owners of capital goods mainly to raise consumption instead. As a result, overall capacity taking account of the improvement in the quality of capital goods rises only modestly. The muted investment response might seem very conservative, because the owners of capital could take greater advantage of the sudden acceleration in the improvement of the quality of capital goods which allows them to raise their production capacity more than usually. However, this conservative behaviour is consistent with an anticipated faster decline in the value of capital goods which become quickly obsolete, raising the cost of capital for the owners. Finally, this paper analyses the implications of the shock to capital-embodied technological progress coinciding with other shocks, namely, a positive one to the investment accelerator mechanism and a negative one to the risk premium. With deceleration in the quality improvement of capital goods, investors would require higher rates of return while affecting negatively the valuation of the capital stock.


Keywords: asset valuation, capital goods, obsolescence, Capital stock, investment, technological progress
JEL: O31: Economic Development, Innovation, Technological Change, and Growth / Innovation; Research and Development; Technological Change; Intellectual Property Rights / Innovation and Invention: Processes and Incentives; E22: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Investment; Capital; Intangible Capital; Capacity; D92: Microeconomics / Micro-Based Behavioral Economics / Intertemporal Firm Choice, Investment, Capacity, and Financing; O47: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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