Enter the Research Conversation with Adeliada Mehmetaj
What are the implications of endogenous capital depreciation on productivity growth?
My job-market paper examines how endogenous capital depreciation due to replacement of obsolete capital-embodied technologies can lead to mismeasurement of productivity growth.
Capital is an important factor of production. As such, measuring capital correctly is crucial for the estimation of Total Factor Productivity (TFP) in growth accounting. The literature generally assumes that new and old capital can be combined seamlessly and capital depreciation is a constant. These are both restrictive assumptions since newer capital embodies better/more innovative technologies, which in turn may render older capital obsolete. For example, once faster computers became available firms started switching older versions for them. There is a substitutability between new and old capital vintages that the standard capital accumulation equation does not incorporate. Failing to account for this substitutability results in an upward-biased capital stock measure. Overstating capital stock, renders TFP growth rate computed from standard growth accounting to be a biased estimate of true productivity growth.
I show that the TFP bias overstates the true slowdown in productivity in late-1970s to mid-1990s by approximately 15% and adjusting for the bias in TFP in mid-2000s results in a 17% more severe slowdown than what has been shown in the literature.
Area of Research
macroeconomics, capital markets, business cycles, productivity growth
When I was 18 I was offered a record deal back in my country based on my singing. I obviously turned it down to focus on my school.