* Instituto Tecnolgico Autnomo de MØxicoMexico and Texas A&M UniversityU.S.A. 121 Endogenous Capital Utilization in a Neoclassical Growth Model BEATRIZ RUMBOS AND LEONARDO AUERNHEIMER * This paper introduces a variable rate of capital utilization and depreciation into a modified Ramsey-type neoclassical growth model via the well-known concept of pure user cost. The optimal utilization rate is found to be determined by the opportunity cost of holding capital or the net real interest rate. As a consequence, this rate may vary in the short run, so total services of capital become a control rather than a state variable. Furthermore, the introduction of a variable utilization rate yields a slower rate of convergence toward the steady state, inducing more persistence in the transitional dynamics. To illustrate how the endogenous choice of utilization acts on the system, some simulations are carried out, including the transition period when there is a temporary fall in the exogenous real interest rate. (JEL E13; Atlantic Econ. J., 29(2): pp. 121-134, June 01. 'All Rights Reserved) Introduction In the standard theory of capital and factor demand, the rate of physical depreciation is usually taken to be constant. Nonetheless, it has long been recognized that depreciation may be subject to choice by the users of capital. The idea that capital depreciates faster when used more intensively has been around at least since Marshall [1922] and was tackled by Keynes [1936] through the concept of pure user cost. Capital may be used with varying degrees of intensity, and the cost of such use is borne through increased depreciation of the good, commonly known as "wear and tear." Some examples of this line of research are Calvo [1975], Auernheimer [1986], Diewert [1978], Bischoff and Kokkelenberg [1987], and Johnson [1994]. There is a second strand in literature concerning the choice of an optimal depreciation rate, developed independently despite addressing the same problem. This is related to the case in which depreciation is embodied in the capital good at the time it is produced. The depreciation rate is then interpreted as a measure of durability or quality. In this case, both the cost of production and the market price of the good are decreasing functions of the depreciation rate, and it is up to the producer to choose the optimal depreciation rate. The question has been studied in the literature on consumer durable goods, particularly after the important paper by Swan [1970] which showed that optimal durability is independent of demand considerations and ultimately determined by the real interest rate. Auernheimer and Saving [1977] extend Swans result to a more general setup in which the firm is subject to adjustment costs.