Aggregation of Producer Durables with Exogenous Technical Change and Endogenous Useful lives

The received theory of aggregation has been erected on certain fundamental hypotheses. One of them is that producer durables deteriorate exponentially, which implies that their replace-ment is proportional to the corresponding capital stocks. However the proportionality hypothesis conflicts with most of the available theoretical and empirical evidence. So an effort to relax it is long overdue. To this end the present paper investigates the conditions for consistent aggregation in a two-sector vintage capital model with exogenous technological change and endogenous use-ful lives. In the model aggregation is achieved by adaptation of the procedure first suggested by Haavelmo (1960). From the simulations of the solution with data from the United States in the post-war period it is found that the conventional approach to aggregation may be responsible for significant biases in the measurement of the economy-wide capital stock.