Abstract
In this work we study the consequences of assuming a variable utilization rate for capital, in both a general and a partial equilibrium contexts. As is common in the literature, capital is assumed to have a pure user cost so that it depreciates more when used more intensively. The optimality condition for the use of capital is the usual one that determines optimal usage or depreciation in terms of the net real interest rate. In order to allow for short run variations in utilization we introduce imperfect capital mobility in two ways: first, by adopting adjustment costs for investment and second, by assuming irreversibility of investment. As a result, we obtain that unanticipated permanent shocks on aggregate output are magnified and, anticipated shocks cause output to move in a direction opposite to that of the shock during the adjustment. These results extend Auemeheimer's (1986) partial equilibrium industry analysis. We can also generate procyclical fluctuations of output, investment and consumption with unanticipated shocks to the adjustment cost function. These results are similar in nature to those obtained in Greenwood, Hercovitz and Huffman (1988); furthermore, they strengthen the hypothesis that a variable utilization rate may be an important component of business cycles. At the firm's level, we analyze the impact of variable utilization of the capital input, when the firm is subject to a rate of return constraint. We find that the usual overcapitalization predicted by the well-known Averch-Johnson effect holds, but the effect is mitigated when total services of capital are considered. This is caused by a lower rate of usage of capital within the regulated firm. When dynamics are introduced into the model, we find that "overcapitalization" and "underinvestment" may coexist in the regulated firm, due to the lower utilization rate. We then analyze the adjustment process for an anticipated deregulation and find that "inefficiencies" in utilization may substitute for "inefficiencies" within the labor market throughout the transition.
Rumbos, Irma Beatriz (1995). A variable rate of capital utilization in general and partial equilibrium contexts. Texas A&M University. Texas A&M University. Libraries. Available electronically from
https : / /hdl .handle .net /1969 .1 /DISSERTATIONS -1575863.