Why Do Computers Depreciate?

48 Pages Posted: 29 Oct 2004 Last revised: 7 Aug 2022

See all articles by Michael J. Geske

Michael J. Geske

University of Michigan at Ann Arbor - Department of Economics

Valerie A. Ramey

University of California at San Diego; National Bureau of Economic Research (NBER)

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 2004

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.

Suggested Citation

Geske, Michael J. and Ramey, Valerie A. and Shapiro, Matthew D., Why Do Computers Depreciate? (October 2004). NBER Working Paper No. w10831, Available at SSRN: https://ssrn.com/abstract=603651

Michael J. Geske

University of Michigan at Ann Arbor - Department of Economics ( email )

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Valerie A. Ramey (Contact Author)

University of California at San Diego ( email )

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National Bureau of Economic Research (NBER)

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Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics ( email )

and Survey Research Center
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National Bureau of Economic Research (NBER) ( email )

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