A model of and some evidence on the interrelatedness of decisions underlying the demand for capital services

The objective in this paper is to investigate systematically the existence and nature of interactions among the decisions for gross investment, capital scrappage, and maintenance expenditures. For this purpose, a three-equation model is proposed and implemented econometrically, using data from the locomotives and freight cars of the Class-I railways in the United States during the period 1944–1970. The results obtained suggest that, for the assets studied, the aforementioned decisions exhibit substantial interactions that arc in accord with most a priori considerations. The structural estimates of the model, for example, show that, among other things: (a) gross investment is related positively to scrappage and maintenance expenditures of both locomotives and freight cars are associated inversely, and (c) maintenance expenditures are also significantly influenced by either current or lagged gross investment.