General summaries of capital utilization are given in Betancourt (1987), Betancourt and Clague (1981), and Winston (1982).
There are several definitions of capital utilization. Betancourt (1986) refers to capital utilization as the duration of operations of productive processes. Bosworth and Dawkins (1983) refer to capital utilization as the timing of input flows and in particular to shift work and overtime. A traditional strand of the literature refers to the ratio of actual usage to a maximum value derived from technical-engineering specifications (Bosworth 1985, pages 21-22, Foss 1963). Berndt (1990) defines capital utilization as the ratio of the desired stock of capital (given output and input prices) to the actual stock of capital. Fare et al. (1994) offer the same definition. Schworm (1977), Hulten (1986; 1990), and Lee (1995) defined capital utilization as the ratio of capital services to the stock of capital.
The utilization of equipment over a given time period can be varied along two dimensions, duration and intensity (speed) (Betancourt, 1986). The speed of operations is typically assumed constant and variations in utilization come through variations in duration over a given time period. Six main implications for capital utilization that have been derived from cost minimization are given by Betancourt (page 917).
The endogenous capital utilization literature allows the rate of capital utilization to vary with input prices and output levels or their price, and hence is a choice variable to firms. The rate of capital utilization, whether in the form of the length of time that capital is operated or the intensity of its operation per unit of time, is determined by profit maximization. The rate of utilization and the amount of maintenance determine the depreciation rate, which also varies and is a choice variable (i.e. endogenous) to firms. The endogenous rate of utilization is related to a firm’s investment decisions, since in deciding on how much of its beginning of period capital stocks are left over at the end of the time period, the firm effectively decides on the rate of depreciation of its capital stocks.
In the endogenous capital utilization literature, Epstein and Denny (1980) allowed capital utilization to be variable in the short run, when the capital stock is fixed, but fixed in the long run, when the capital stock is variable. In the long run, the firm must make the simultaneous choice of the levels of capital utilization and the capital stock. Kim (1988) and Prucha and Nadiri (1996) extended this approach. The capital intensity of the technology and the range of ex-ante substitution possibilities available in the technology have a positive influence on the incentive to utilize (Betancourt 1986).
