Capital Maintenance and Investment : Complements or Substitutes ?

This paper is concerned with the theoretical properties of demand for capital maintenance services. To this end, we consider two investment problems incorporating maintenance services and we analyse their steady state equilibria. At first, we shwo that if no variable capital utilization rate is allowed, investment and maintenance expenditures have the same qualitative properties, and so cannot be regarded as gross substitutes. If a variable rate of capital utilization is allowed, the occurence of substitution Vs complementarity features and the comparative statics properties depend on the sensitivity of the postulated capital depreciation function with respect to both the rate of capital utilization and the maintenance expenditures ratio. We prove that the case where the elasticity with respect to maintenance expenditures is lower, gives much better shaped demand functions and fits definitely better the recent real business cycles studies.