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- Title
Investment and the Optimal Idleness of Capital.
- Authors
Winston, Gordon C.; McCoy, Thomas O.
- Abstract
The stock of manufacturing capital in the U.S. is idle over 75 per cent of the time even when aggregate demand is strong. In underdeveloped countries, recent studies suggest greater idleness of capital despite its presumed scarcity. An essentially orthodox cost minimization model shows that intended idleness of capital is part of the firm's optimal investment decision, a larger-than-necessary capital stock may be installed so that the desired output can be produced by utilizing the production process only part of the time. The necessary condition for optimally building idleness into the capital stock is that some input cost varies rhythmically over time. Other cost rhythms in production are generated by agricultural inputs over yearly rhythms, by electricity prices over daily, weekly and seasonal rhythms, and by natural inputs like light and temperature whose rhythmic changes in availability over yearly or daily periods can be compensated for in production, but only at a cost. These cost rhythms mean that it is often optimal to "overbuild" the capital stock in order to produce only during periods of low input costs and avoid operation during periods of high costs.
- Subjects
UNITED States; CAPITAL; CAPITAL stock; INVESTMENTS; CAPITAL productivity; UNITED States manufacturing industries; COST control; ECONOMIC demand; PRODUCTION (Economic theory)
- Publication
Review of Economic Studies, 1974, Vol 41, Issue 3, p419
- ISSN
0034-6527
- Publication type
Article
- DOI
10.2307/2296759