Getting Rental Prices Right for Computers: Reconciling Different Perspectives on Depreciation

Abstract

National statistical agencies frequently assume high geometric depreciation rates for computers. However, typically the service flow that a computer generates over its useful life is roughly constant, which contradicts the geometric model of depreciation. A one hoss shay model of depreciation seems to be more appropriate for computers. The paper uses Australian data on computer investment over the past 25 years to construct one hoss shay estimates of computer capital stocks and flows and considers how best to approximate these more realistic models of depreciation with a geometric model. The paper shows that under certain assumptions, a geometric model can provide an exact approximation to an underlying one hoss shay model. This exactness result is extended to a more general model of depreciation, the Constant Efficiency Profile model. Finally, the paper shows how well the geometric approximation fits a one hoss shay model when the assumptions are not satisfied.