Vintage technology, optimal investment and technology adoption Benteng Zou ⁎ IMW, Bielefeld University, 33501 Bielefeld, Germany Accepted 6 February 2006 Abstract In this paper, we study a vintage technology model under a market equilibrium setting. In this model, firms can invest not only on new vintage technology, but also on existing ones. We first generalize previous partial equilibrium settings and, second, incorporate the adoption problem into a vintage framework. © 2006 Elsevier B.V. All rights reserved. JEL classification: E22; E32; O40 Keywords: Vintage technology; Embodiment; Technology adoption 1. Introduction Vintage capital models, which were launched in the early 1960s, have become increasingly popular in the economics literature. These models provide an approach for the analysis of investment volatility. The main difference between vintage capital models and the standard neoclassical growth models lies in the fact that, in the former, new technological progress is embodied in new equipment, which gives rise to an endogenous process of creative destruction. Furthermore, as mentioned by Boucekkine et al. (1997) and Benhabib and Rustichini (1991), optimal investment paths are no longer monotonic in contrast to the standard neoclassical growth model. In vintage capital models, the replacement of the old equipment is an economic decision, allowing for a formalization in the Schumpeterian vein. This replacement decision induces non- monotonic optimal paths for investment according to an echo principle. Economic Modelling 23 (2006) 515 – 533 www.elsevier.com/locate/econbase ⁎ Tel.: +49 521 106 4916. E-mail address: bzou@wiwi.uni-bielefeld.de. 0264-9993/$ - see front matter © 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.econmod.2006.02.005