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Abstract
This empirical analysis assesses the determinants of firms’ capital retirement. Particular attention is paid to the impact of the business cycle and the capital usage intensity. Compared to previous studies, we directly control for the capital utilization and disentangle the short-run mechanisms from the long-run ones. The analysis is carried out with an original and large firm-level dataset. The main results of the analysis may be summarized as follows: (i) the retirement rate increases during slowdowns and decreases during booms. This corresponds to a countercyclical capital retirement; (ii) the capital retirement rate increases with the capital usage intensity in the long run. This corresponds to a wear and tear effect, which is small compared to the countercyclical one; (iii) the capital retirement rate increases with the average age of capital; (iv) the profit rate and the wage cost per capita do not have a significant impact on the retirement rate.
Acknowledgements
The authors thank Fabrice Collard for his very useful remarks and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the Banque de France.
Notes
1 In this study, the variables in upper or lower case indicate respectively their level or their natural (napieren) logarithm, and Δ before a variable corresponds to its change compared with the previous period.
2 The average age of capital is evaluated at the end of the time period t, therefore after the retirement already occurred in t. This raises an obvious simultaneity problem between the retirement rate and the contemporaneous average age of capital. We will account for it in the estimations using the lagged values of the average age of capital and instrumental variables.
3 A method to estimate the firm fixed effects in a linear model for panel data is provided by Wooldridge (Citation2001, p. 273).