Academic journal article Economic Inquiry

Empirical Studies of Depreciation

Academic journal article Economic Inquiry

Empirical Studies of Depreciation

Article excerpt

The purpose of this paper is to survey empirical research on depreciation and its applications. As a framework for the survey I employ the econometric model of asset prices introduced by Hall [1971] that has been the primary vehicle for this research for the past two decades. Since 1985 research on asset prices has been used successfully to generate constant quality price indices for investment in computers; these indices are included in the U.S. National Income and Product Accounts. The challenge facing economic statisticians now is to employ asset price information effectively while making badly needed revisions in the treatment of depreciation in the national accounts.

Empirical research on constant quality price indices focuses on the relationship between the prices of assets and their characteristics--processing speed and memory capacity in the case of computers. By contrast, empirical research on depreciation centers on the relationship between the price of an asset and its age, so that prices of assets of different ages or vintages must be analyzed. Since the connection between research on constant quality price indices and depreciation is not obvious, I describe Hall's "hedonic" model of asset prices, which comprehends both, in the next section.

My second objective is to summarize empirical research on depreciation, beginning with the landmark studies of Hulten and Wykoff [1981a; 1981b; 1981c] for the Office of Tax Analysis of the Department of the Treasury. As a consequence of the rapid assimilation of the results of Hulten and Wykoff, depreciation has been transformed from one of the most contentious and problematic areas in economic measurement to one of the best understood and most useful. Empirical research has generated the information needed for revising the treatment of depreciation in the U.S. national accounts.

My third objective is to illustrate the use of information on asset prices in constructing an integrated system of income, product, and wealth accounts. For this purpose I describe a system of vintage accounts introduced by Christensen and Jorgenson [1973]. This system includes accumulation equations that generate the perpetual inventory of assets required for the wealth accounts and asset pricing equations that produce the information on depreciation needed for income and product accounts. A system of vintage accounts is the key to the successful integration of measures of income and product with a measure of wealth.

My overall conclusion is that the U.S. National Income and Product Accounts have failed to provide internally consistent measures of capital stocks and depreciation. Top priority should be assigned to improving the national accounts by incorporating information now available from empirical research on depreciation. Fortunately, this task can be facilitated by using concepts and methods already familiar to economic statisticians from their work on constant quality price indices.

The following section outlines Hall's econometric model of asset prices, focusing on the version of this model employed by Hulten and Wykoff. I also consider an alternative version recently introduced by Oliner [1993]. In section II, I summarize empirical research on depreciation, including studies of asset prices and retirements. Studies of both types are required for constructing a system of vintage asset prices. In section III, I outline the role of depreciation in an integrated system of income, product and wealth accounts. The system of vintage accounts originated by Christensen and Jorgenson provides a natural framework for incorporating the results of empirical research on depreciation. Section IV concludes the paper.


To measure depreciation one needs a set of prices and quantities of investment goods. Investment represents the acquisition of capital goods, for example, a certain number of computers with a given performance. …

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