TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, October 29, 2004

Geske, Ramey & Shapiro on Why Computers Depreciate

Michael Geske, Valerie Ramey (University of California-San Diego, Economics Dep't) & Matthew Shapiro (Michigan, Economics Dep't) have posted Why Do Computeres Depreciate? on the NBER web site. Here is the abstract:

The value of installed computers falls rapidly and therefore computers have a very high user cost. The paper provides a complete account of the non-financial user cost of personal computers -- decomposing it into replacement cost change, obsolescence, instantaneous depreciation, and age-related depreciation. The paper uses data on the resale price of computers and a hedonic price index for new computers to achieve this decomposition. Once obsolescence is taken into account, age-related depreciation -- which is often identified as deterioration -- is estimated to be negligible. While the majority of the loss in value of used computers comes from declines in replacement cost, this paper shows the second most important source of decline in value is obsolescence. Obsolescence is accelerated by the decline in replacement cost of computers. Cheaper computing power drives developments in software and networks that make older computers less productive even though their original functionality remains intact.

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