Conventional or New? Optimal Investment Allocation across Vintages of Technology

This paper develops and analyzes a growth model that features complementary long-lived and short-lived vintage-specific capital. The model generates two distinct investment patterns: if the rate of vintage-specific technological progress is above a threshold, then all new investment is allocated to the capital that embodies the frontier technology; otherwise, some investment is allocated to short-lived capital that embodies vintage technology. Assuming long-lived intangible and short-lived tangible capital, the model provides two important quantitative implications: (i) acceleration in the rate of vintage-specific technological progress can cause an abrupt reallocation of investment towards modern capital; and (ii) equipment price-changes do not necessarily reflect the rate of vintage-specific technological progress.