Collaborative Research: Obsolescence of Durable Goods and Aggregate Fluctuations

New York University, New York NY

Investigators

Abstract

Obsolescence is the major reason for depreciation of durables in markets with high rates of technological innovation. Since much of the technological innovation is incorporated in new durables, modeling obsolescence of durable goods is vital for our understanding of the macroeconomy. The dominant way of thinking about durability is in terms of exponential physical depreciation. Obsolescence is different from physical depreciation in two important respects. First, obsolescence is not a continuous process. Development of new products is costly, which is why new goods are introduced only periodically. For example, new car models appear every year, and new generations of Intel processors appear on average, every three years. Thus periodic arrival of new models makes obsolescence discrete. Second, with obsolescence, the service flow from the good is defined by its technological age. Computers become obsolete because they cannot run the latest software. New car inventory is heavily discounted when the latest models arrive, suggesting that obsolescence is important in cars as well. Since durables age even if never used, consumers who purchase a new model with a delay will enjoy a lower service flow. Thus obsolescence gives consumers an incentive to coordinate their replacement decisions with new model introductions. This way of thinking about obsolescence has not been fully explored before, yet it may have profound effects on the patterns of macroeconomic fluctuations. This project studies a class of dynamic economies with durable goods subject to obsolescence. It looks a general equilibrium models with competitive production of durable goods as well as models of durable good markets with strategic producers.