Technological Progress in a Dynamic Model of the Firm

In most dynamic models of the firm the inputs of the production process, capital and labour, are homogeneous. That means that each unit of such an input has exactly the same characteristics. For instance, the characteristics are not dependent on the date of purchase. But it may happen that, as time progresses, capital goods become available which give a higher output per unit of input. This is called technological progress (which will be abbreviated as TP). Taking this into account leads to the use of vintage models, in which capital goods of different vintage are not treated as being identical. Examples of this approach are for instance models by Malcomson [3] and Nickell [4]. Those models concentrate on the investment behaviour of firms. The purpose of this paper is to study a model which incorporates TP and in which investment policy and financial policy are determined simultaneously.