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Optimal Depreciation Policy: Pricing the Products of Durable Assets

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  • William J. Baumol

Abstract

Depreciation policy is analyzed from the point of view of optimal inter-temporal resource allocation. Because depreciation determines the time pattern of prices of the product of an asset it affects the timing of demands. Models extended from peak-load pricing theory are used to determine rules for depreciation that are consistent with economic efficiency of asset utilization. They show how technological progress, inflation maintenance cost patterns, user costs, and other related elements should affect depreciation. The role of forecasting is considered and it is shown that in certain circumstances prediction becomes virtually unnecessary for optimal depreciation decisions.

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  • William J. Baumol, 1971. "Optimal Depreciation Policy: Pricing the Products of Durable Assets," Bell Journal of Economics, The RAND Corporation, vol. 2(2), pages 638-656, Autumn.
    • Handle: RePEc:rje:bellje:v:2:y:1971:i:autumn:p:638-656
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    Cited by:

    1. Wielhouwer, Jacco L. & Waegenaere, Anja De & Kort, Peter M., 2002. "Optimal tax depreciation under a progressive tax system," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 243-269, December.
    2. Alexander Nezlobin & Madhav V. Rajan & Stefan Reichelstein, 2012. "Dynamics of Rate-of-Return Regulation," Management Science, INFORMS, vol. 58(5), pages 980-995, May.
    3. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    4. Gylfason, Thorvaldur & Zoega, Gylfi, 2007. "A golden rule of depreciation," Economics Letters, Elsevier, vol. 96(3), pages 357-362, September.
    5. Fellows, G. Kent, 2011. "Negotiated settlements with a cost of service backstop: The consequences for depreciation," Energy Policy, Elsevier, vol. 39(3), pages 1505-1513, March.
    6. Knieps, Günter & Küpper, Hans-Ulrich & Langen, René, 2000. "Abschreibungen bei Preisänderungen in stationären und nicht stationären Märkten," Discussion Papers 71, University of Freiburg, Institute for Transport Economics and Regional Policy.
    7. Kamphorst, Jurjen & Mendys-Kamphorst, Ewa & Westbrock, Bastian, 2020. "Fixed costs matter even when the costs are sunk," Economics Letters, Elsevier, vol. 195(C).
    8. Guthrie, Graeme, 2012. "Regulated prices and real options," Telecommunications Policy, Elsevier, vol. 36(8), pages 650-663.
    9. Adkins, Roger & Paxson, Dean, 2013. "The effect of tax depreciation on the stochastic replacement policy," European Journal of Operational Research, Elsevier, vol. 229(1), pages 155-164.
    10. Robert D. Cairns, 2013. "The fundamental problem of accounting," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 634-655, May.
    11. Charles S. Tapiero & Armand Leinekugel-Le Cocq, 1973. "Investissements, utilisation de capacité productive et amortissements : politiques optimales," Revue Économique, Programme National Persée, vol. 24(3), pages 442-459.
    12. Lloyd R. Amey & Jean†Louis Goffin, 1988. "Joint product decisions: The variable proportions case," Contemporary Accounting Research, John Wiley & Sons, vol. 5(1), pages 174-198, September.
    13. William P. Rogerson, 1989. "Optimal Depreciation Schedules for Regulated Utilities," Discussion Papers 852, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. Rogerson William P, 2011. "On the Relationship Between Historic Cost, Forward Looking Cost and Long Run Marginal Cost," Review of Network Economics, De Gruyter, vol. 10(2), pages 1-31, June.
    15. Gaowang Wang & Heng-fu Zou, 2010. "Multiple Equilibria and Indeterminacy in an Optimal Growth Model with Endogenous Capital Depreciation," CEMA Working Papers 392, China Economics and Management Academy, Central University of Finance and Economics.
    16. Jurjen (J.J.A.) Kamphorst & Ewa (E.) Mendys-Kamphorst & Bastian (B.) Westbrock, 2018. "Fixed Costs Matter," Tinbergen Institute Discussion Papers 18-095/VII, Tinbergen Institute.
    17. Seeto, Dewey & Woo, C. K. & Horowitz, Ira, 1997. "Time-of-use rates vs. Hopkinson tariffs redux: An analysis of the choice of rate structures in a regulated electricity distribution company," Energy Economics, Elsevier, vol. 19(2), pages 169-185, May.

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