Econometrica: May 1974, Volume 42, Issue 3

Towards an Economic Theory of Replacement Investment

https://doi.org/0012-9682(197405)42:3<393:TAETOR>2.0.CO;2-U
p. 393-424

Martin S. Feldstein, Michael Rothschild

This paper develops an economic theory of replacement investment that can provide a basis for specifying an econometric model of investment behavior. The long-run and short-run effects of changes in the interest rate and in tax laws are examined. The paper also investigates several reasons why the common assumption of a technologically constant rate of replacement is incorrect even as an asymptotic limit.

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