Capital utilization, obsolescence and technological progress

Abstract

In a standard endogenous R&D growth model with expanding variety of intermediate inputs I incorporate endogenous depreciation rate for the intermediate inputs. The depreciation rate depends negatively on the utilization rate of the intermediate inputs and positively on their durability level, resulting into smaller economic growth relatively to the standard models of expanding variety inputs. The reason is that higher durability for intermediate inputs implies a lower demand for the intermediate inputs which in turn reduces the motivation for innovation. The utilization rate on the other hand, even if it increases the depreciation rate, is responsible for higher demand for the intermediate inputs and therefore it increases the motivation for innovation. The two forces (durability and utilization) have an asymmetric effect on economic growth.