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Embodiment, Productivity, and the Age Distribution of Capital

  • Whelan, Karl

An important theme in modern research on productivity has been that technological progress may be embodied in capital in the sense that traditional measures of TFP growth reflect unmeasured improvements in the quality of capital inputs as well as pure disembodied technological progress. It is commonly believed that an implication of this embodiment hypothesis is that there should be a negative relationship between measured TFP and the age of the measured capital stock. This paper presents empirical evidence which suggests that an increase in the age of the capital stock is actually associated with higher TFP growth. This surprising result may be due to the presence of a mis-measurement normally overlooked in this literature: With mis-measured improvements in capital quality, the usual depreciation rates used to construct empirical capital stocks are incorrect for growth accounting. This effect dominates the usual average age effect.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5912.

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Date of creation: May 2005
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Handle: RePEc:pra:mprapa:5912
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  1. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-62, June.
  2. Stiroh, Kevin J, 2002. "Are ICT Spillovers Driving the New Economy?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(1), pages 33-57, March.
  3. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557.
  4. Wolff, Edward N, 1996. "The Productivity Slowdown: The Culprit at Last? Follow-Up on Hulten and Wolff," American Economic Review, American Economic Association, vol. 86(5), pages 1239-52, December.
  5. Cummins, Jason G & Violante, Giovanni L, 2002. "Investment-Specific Technical Change in the US (1947-2000): Measurement and Macroeconomic Consequences," CEPR Discussion Papers 3584, C.E.P.R. Discussion Papers.
  6. Plutarchos Sakellaris, 2001. "Production function estimation with industry capacity data," Finance and Economics Discussion Series 2001-06, Board of Governors of the Federal Reserve System (U.S.).
  7. Wolff, Edward N, 1991. "Capital Formation and Productivity Convergence over the Long Term," American Economic Review, American Economic Association, vol. 81(3), pages 565-79, June.
  8. McHugh, Richard & Lane, Julia, 1983. "The Embodiment Hypothesis: An Interregional Test," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 323-27, May.
  9. Karl Whelan, 2002. "Computers, Obsolescence, And Productivity," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 445-461, August.
  10. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, 07.
  11. repec:ucn:oapubs:10197/204 is not listed on IDEAS
  12. Richard McHugh & Julia Lane, 1986. "The age of capital, the age of utilized capital, and tests of the embodiment hypothesis," Working Papers 86-4, Federal Reserve Bank of Philadelphia.
  13. Hulten, Charles R & Wykoff, Frank C, 1996. "Issues in the Measurement of Economic Depreciation: Introductory Remarks," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 10-23, January.
  14. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
  15. Stephen D. Oliner, 1993. "Constant-Quality Price Change , Depreciation, and Retirement of Mainframe Computers," NBER Chapters, in: Price Measurements and Their Uses, pages 19-62 National Bureau of Economic Research, Inc.
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