Variable Capital Utilization and Indeterminacy

Variable capital utilization has been widely used in business cycle research based on the observation that utilization rate is variable over time. The common assumption is that capital depreciates faster when it is utilized more extensively. This paper shows analytically that variable capital utilization makes it easier for indeterminacy to arise. In particular, when both capital utilization and labor supply become infinitely elastic, the required degree of external increasing returns can be arbitrarily small.