Strategic Timing of Investment over the Business Cycle: Machine Replacement in the US Rental Industry

2018 ◽  
Vol 238 (3-4) ◽  
pp. 295-351 ◽  
Author(s):  
John McClelland ◽  
John Rust
Keyword(s):  
Business Cycle ◽  
Programming Model ◽  
Optimal Timing ◽  
Data Set ◽  
Replacement Strategy ◽  
Equipment Replacement ◽  
Optimal Replacement ◽  
The Business Cycle ◽  
The Cost ◽  
Machine Replacement

Abstract We analyze a data set containing rental revenues, maintenance costs, and sale prices of five different types of rental machines to econometrically estimate key relationships needed to implement a dynamic programming model of the optimal timing of replacement of rental equipment owned by a large multi-location firm in the equipment rental industry. The model reveals significant potential to improve rental company profitability by improving the strategic timing of equipment replacement. The gains from the optimal replacement strategy come from exploiting seasonal variation in rental demand and the timing of the business cycle due to their effects on rental revenues and the cost of replacement. For some machines we find the optimal replacement strategy is procyclical, but for others we find that a countercyclical replacement strategy –- where replacements are concentrated in slow periods of the business cycle –- can significantly increase firm profits.

scholarly journals Hiring, Churn, and the Business Cycle

2012 ◽  
Vol 102 (3) ◽  
pp. 575-579 ◽  
Author(s):  
Edward P Lazear ◽  
James R Spletzer
Keyword(s):  
Business Cycle ◽  
Job Creation ◽  
Labor Turnover ◽  
Present Evidence ◽  
Employment Dynamics ◽  
Job Openings ◽  
The Business Cycle ◽  
The Cost

Hires occur for two reasons - to grow a business and to replace those who have left (churn). Churn is an important part of employment dynamics, allowing workers to move to their most productive use. We present evidence on churn from the Job Openings and Labor Turnover Survey (JOLTS). Churn is procyclical. During the 2007-09 recession, four-fifths of hiring reductions are associated with reduced churn, not with reductions in job creation. We estimate that the cost of reduced churn is about two-fifths of a percentage point of GDP annually throughout the three-and-one-half year period since the beginning of the recession.

BUSINESS CYCLE AND OPTIMAL TIMING FOR INVESTMENT

2012 ◽  
Vol 6 (1) ◽  
pp. 31-41
Author(s):  
Joseph Cheng ◽  
Jeffery Lippitt
Keyword(s):  
Standard Deviation ◽  
Business Cycle ◽  
Risk Ratio ◽  
Equity Capital ◽  
Optimal Timing ◽  
Expected Return ◽  
Gdp Growth Rate ◽  
The Business Cycle ◽  
Risk Free Rate ◽  
Free Rate

The objective of this paper is to determine which point of the business cycle offers investors the best reward to risk ratio in the stock market.  Expected reward is defined as expected return in excess of the risk free rate, whereas risk is defined as the standard deviation of return.  Thus, the expected reward to risk ratio is measured by expected return in excess of risk free rate relative to the standard deviation of return.  Expected return in excess of the risk free rate and standard deviation of return are generated on a continuum of time periods and the GDP growth rate.  The point where the expected reward to risk ratio peaks, would signify the best time for investment.  Being able to identify this point could help investors in deciding the best time to invest as well as help firms in choosing a favorable time for raising equity capital.  While most people think that the best time to invest is near the bottom, it is not clear whether the best time for investing is before, at, or after the economic trough.  The interesting finding in our model is that the best time is after the point of the economic trough.

Modelling cyclical variation in the cost pass-through: a regime-dependent approach

2020 ◽  
Vol 67 (2) ◽  
pp. 97-113
Author(s):  
Karolina Konopczak
Keyword(s):  
Business Cycle ◽  
Cyclical Variation ◽  
Business Cycle Fluctuations ◽  
Industrial Sectors ◽  
Labour Costs ◽  
Cyclical Behaviour ◽  
The Business Cycle ◽  
Pass Through ◽  
The Cost ◽  
Markup Adjustment

In this study a regime-dependent ARDL model is developed in order to investigate how labour costs feed through into prices conditional on the business cycle position. Its estimates enable inference on the cyclical behaviour of markups. The proposed methodology is applied to the Polish industrial sectors. The obtained estimates point to procyclicality as the prevailing pattern of markup adjustment. Thus, overall markups in the Polish industry seem to have a mitigating effect on business cycle fluctuations. The degree of procyclicality seems, however, to be positively correlated with the degree of the industry’s competitiveness.

scholarly journals Optimal replacement policy under cumulative damage model and strength degradation with applications

2021 ◽  
Author(s):  
Phalguni Nanda ◽  
Prajamitra Bhuyan ◽  
Anup Dewanji
Keyword(s):  
Damage Model ◽  
Strength Degradation ◽  
Cumulative Damage ◽  
Expected Cost ◽  
Replacement Strategy ◽  
Optimal Replacement ◽  
Poisson Arrival ◽  
Cumulative Damage Model ◽  
The Cost ◽  
Minimum Expected Cost

AbstractIn many real-life scenarios, system failure depends on dynamic stress-strength interference, where strength degrades and stress accumulates concurrently over time. In this paper, we consider the problem of finding an optimal replacement strategy that balances the cost of replacement with the cost of failure and results in the minimum expected cost per unit time under cumulative damage model with strength degradation. In the most general setting, we propose to find optimal choices of three thresholds on operation time, number of arriving shocks and amount of cumulative damage such that replacement of the system due to failure or reaching any of the three thresholds, whichever occurs first, results in the minimum expected cost per unit time. The existing recommendations are applicable only under the assumption of Exponential damage distribution including Poisson arrival of shocks and/or with fixed strength. As theoretical evaluation of the expected cost per unit time turns out to be very complicated, a simulation-based algorithm is proposed to evaluate the expected cost rate and find the optimal replacement strategy. The proposed method is easy to implement having wider domain of application including non-Poisson arrival of shocks and non-Exponential damage distributions. For illustration, the proposed method is applied to real case studies on mailbox and cell-phone battery experiments.

scholarly journals Maquiladora Downturn: Structural Change Or Cyclical Factors?

2011 ◽  
Vol 3 (8) ◽  
Author(s):  
Jesus Canas ◽  
Roberto Coronado ◽  
Robert W. Gilmer
Keyword(s):  
Business Cycle ◽  
Structural Changes ◽  
Economic Recession ◽  
Real Wages ◽  
Government Officials ◽  
Mexican Government ◽  
The Media ◽  
The Business Cycle ◽  
The Cost ◽  
Employment Decline

Mexicos maquiladora industry is currently the focus of much attention in the media, in corporate boardrooms, and among Mexican government officials. After watching the maquiladora industry sustain its biggest ever employment decline in recent years, many observers now question the industrys future in Mexico. The 2001 U.S. economic recession took a heavy toll on Mexicos maquiladora industry, although the size of the industrys contraction during the recent recessionalmost 260,000 jobssuggests there are more factors at work than the mild business cycle. The advantages of operating plants in Mexico, such as low wages and tax incentives, are now offered by a number of developing countries. At the same time, location has become less important for many products, as innovations in transportation and technology lower shipping costs. This paper attempts to estimate how much of the current maquiladora downturn is due to the business cycle and how much is due to structural changes. We use the Branson-Love methodology to estimate structural and cyclical impacts on the maquiladora employment downturn. Results suggest that the 2001 U.S. recession and rising real wages in Mexico account for much of the maquiladora downturn. Historically, these are the two most important factors during maquiladora growth, but new factors such as Chinas membership in the World Trade Organization, the Caribbean initiative and implementation of NAFTA Article 303 have changed corporate options for plant location or affected the cost structure in Mexico. Although our statistical results strongly suggest a recovery in maquiladora employment, potentially important qualifications are discussed as well.

scholarly journals Endogenous Liquidity and the Business Cycle

2015 ◽  
Vol 105 (6) ◽  
pp. 1883-1927 ◽  
Author(s):  
Saki Bigio
Keyword(s):  
Asymmetric Information ◽  
Business Cycle ◽  
Great Recession ◽  
Financial Constraints ◽  
Aggregate Fluctuations ◽  
The Great Recession ◽  
The Business Cycle ◽  
The Cost

I study an economy where asymmetric information about the quality of capital endogenously determines liquidity. Liquid funds are key to relaxing financial constraints on investment and employment. These funds are obtained by selling capital or using it as collateral. Liquidity is determined by balancing the costs of obtaining liquidity under asymmetric information against the benefits of relaxing financial constraints. Aggregate fluctuations follow increases in the dispersion of capital quality, which raise the cost of obtaining liquidity. An estimated version of the model can generate patterns for quantities and credit conditions similar to the Great Recession. (JEL D82, E22, E24, E32, E44, G01)

A NOTE ON THE BUSINESS CYCLE IMPLICATIONS OF TRADE IN INTERMEDIATE GOODS

2013 ◽  
Vol 18 (5) ◽  
pp. 1172-1186 ◽  
Author(s):  
Aurélien Eyquem ◽  
Güneş Kamber
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Intermediate Goods ◽  
Relative Prices ◽  
Cost Channel ◽  
The Business Cycle ◽  
Pass Through ◽  
Exchange Rate Pass Through ◽  
The Cost

Trade in intermediate goods is an important feature of trade in developed small open economies. We show that a model that assumes trade in intermediate goods brings the dynamics of an otherwise standard small open economy closer to what is observed in the data. With trade in intermediate goods, movements of international relative prices affect the economy through an additional channel, denoted the “cost channel.” A model embedding this channel comes closer to business cycle data in several dimensions compared to models with trade in final goods only. It increases the share of output variance explained by foreign shocks, lowers the exchange rate pass-through, and delivers a positive international correlation of outputs. In addition, the matching of other business cycle moments is at least as good as in a model with trade in final goods only.

scholarly journals Machine Replacement and the Business Cycle: Lumps and Bumps

10.3386/w5260 ◽  
1995 ◽  
Author(s):  
Russell Cooper ◽  
John Haltiwanger ◽  
Laura Power
Keyword(s):  
Business Cycle ◽  
The Business Cycle ◽  
Machine Replacement

Income inequality and the cost of recessions

2021 ◽  
Vol 71 (1) ◽  
pp. 85-97
Author(s):  
Mostafa Shahee ◽  
Glenn P. Jenkins
Keyword(s):  
Income Inequality ◽  
Business Cycle ◽  
Empirical Evidence ◽  
Gini Index ◽  
High Income ◽  
Income Distributions ◽  
The Business Cycle ◽  
The Cost ◽  
The Relationship

AbstractThis study empirically examines the relationship between the severity of recessions experienced by countries and their income distributions. The analysis is carried out for 28 higher middle- and high-income countries between 1970 and 2013. The empirical evidence derived from the changes in the Gini-index suggests that a greater degree of income inequality increases the cumulative loss of GDP inflicted by recessions. The increased cost emerges from both a longer duration and a deeper amplitude for the contractionary phase of the business cycle.

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