Logarithmic Depreciation

Abstract

This paper studies logarithmic depreciation which is similar to conventional geometric depreciation, except that capital and investment are replaced by their logarithms. We provide empirical and theoretical evidence that logarithmic depreciation can account for capital depreciation better than geometric depreciation and about as well as a more general method that has an additional parameter. We document that consumption and investment decisions in the United States and other countries appear to be made under the erroneous assumption that capital approximately depreciates geometrically and the welfare losses from doing so are large.

Keywords: Adjustment costs, Bayesian, Capital, Investment, Robustness

JEL Classification: E22, O41, C51