Maintenance expenditures and indeterminacy under increasing returns to scale

Authors


  • An earlier version of this paper was titled “Maintenance Labor and Indeterminacy under Increasing Returns to Scale”. For helpful comments and suggestions, we thank Sharon Harrison, Berthold Herrendorf, Takashi Kamihigashi, Qinglai Meng, Kazuo Mino, Tomoyuki Nakajima, Kazuo Nishimura, Richard Rogerson, Kazuo Shimomura, Ping Wang, Chong-Kee Yip, seminar participants at Academia Sinica (Taiwan), National Taiwan University, Chinese University of Hong Kong, Feng-Chia University (Taiwan), the Spring 2005 Midwest International Economics and Economic Theory Meetings, Kobe University, Kyoto University, Osaka University, Arizona State University, and the 2006 North American Summer Meeting of the Econometric Society.

Abstract

This paper develops a one-sector real business cycle model in which competitive firms allocate resources for the production of goods, investment in new capital and maintenance of existing capital. Firms also choose the utilization rate of existing capital. A higher utilization rate leads to faster capital depreciation, and an increase in maintenance activity has the opposite effect. We show that as the equilibrium ratio of maintenance expenditures to GDP rises, the required degree of increasing returns for local indeterminacy declines over a wide range of parameter combinations. When the model is calibrated to match empirical evidence on the relative size of maintenance and repair activity, we find that local indeterminacy (and belief-driven fluctuations) can occur with a mild and empirically-plausible degree of increasing returns: approximately 1.08.

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