DURABILITY, MAINTENANCE AND THE PRICE OF USED ASSETS

This paper considers assets whose service flow decays at a rate determined by built-in durability and the level of maintenance. A cost minimization model determines optimal durability and maintenance and shows how these variables respond to changes in interest rates, the price of maintenance, and the cost of new assets. The price of old assets adjusts so that the cost of services from both old and new assets is the same. The model provides a framework for analyzing data on automobile scrapping rates and repair expenditures. Data for postwar United States show that scrapping rates are sensitive to the price of repairs relative to the price of new cars. The amount of repairs per car also responds to the relative repair price .