New Issues in the Theory of Investment : Modernization and Persistence Effects

This monograph starts with a survey of the One-Relative- Price (Q value) Theory of Investment and then explores the richness of the Many-Relative-Price Theory of Investment: Firstly a tractable model of modernization investment is presented which recognizes that in modern economies more than half of the gross investments consists of replacement investments, and that the main motive for replacement investments is to modernize the capital stock. This model predicts that an activation of investments by fiscal policy is only possible at the cost of causing an ageing of capital stock. Secondly a model is presented in which initial over- or underinvestments cause further over- or underinvestments and thus have a persistent effect on the structureof the capital stock. This model explains why in centrally planned economies a rapid and persistently extensive growth was possibleand had to be followed by stagnation