Capital depreciation and investment demand

Abstract

Little is known about the way in which capital depreciates. Researchers from Gnliches (1960) to Hulten, Robertson, and Wykoff(1989) have inferred patterns of depreciation from the age-price profile of used capital goods. An alternative method, pioneered by Coen (1975), infers depreciation patterns from the behavior of investment expenditures. This study exploits Coen's investment approach. Numerous capital stocks, generated for alternative combinations of depreciation methods and service lives, are fitted to a standard neoclassical model of investment demand. Several newly developed non-nested tests are used to determine which pattern of depreciation is best. This study provides, for the first time, findings relating to whether the differences in the ability of alternative patterns of depreciation to explain actual investment expenditures are statistically significant.Aggregate data for U.S. manufacturing industry's investment in producers' durable equipment and nonresidential structures for the period 1949–1982 are analysed. The results indicate that the hypothesis that all depreciation is geometric may be rejected, for both structures and equipment. However, it is not possible to accept any single pattern as representing all depreciation.