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Capital-embodied Technological Progress and Obsolescence: How Do They Affect Investment Behavior?

I estimate a dynamic stochastic general equilibrium model to investigate the effects of capital-embodied technological progress on business cycle fluctuations, highlighting the role of economic obsolescence. Against a temporary shock to capital-embodied technological progress, I find that investments rise only in quality-adjusted terms. The behavioral response of agents in new investment is muted, thereby avoiding substantial discards of old capital goods, which are made obsolete more than usual. By incorporating the loss in the value of old capital goods, while specifying properly the rise in the rental rate and the value of a marginal unit of capital so that they reflect their market value, the reaction of new investment remains limited while the utilization of old vintages intensifies. I argue that agents compensate for capital losses on old capital goods caused by such a shock and avoid further discards of old capital goods in the production process by limiting new investment.