Obsolescence Vs Modernization in a Schumpeterian Vintage Capital Model

In this paper, we build up a general equilibrium model explicitly incorporating Schumpeterian growth a la ` Aghion and Howitt (1992) and a vintage capital structure in line with Solow (1960). Technological progress is embodied. We show that the investment rate is a fundamental determinant of the profitability of R&D in contrast to the R&D based growth models with disembodied technical progress. We characterize the balanced growth paths and point at the possible existence of multiple equilibria due to the strategic complementarity between investment and R&D activities. More importantly, the embodiment hypothesis is shown to give rise to a precise modernization mechanism through investment and the average age of capital. The modernization effects of investment may well balance the typical obsolescence costs inherent to embodiment, a result that should be of interest in the current debate on the viability of the current information technology boom as a long run growth regime