This document summarizes a study that surveyed Italian firms to determine realistic service lives for machinery and equipment, compared to the values used in national accounts. The survey found service lives were 4 years shorter than official statistics. Updating to the survey values significantly reduced the calculated capital stock, especially for services and construction. While capital service flows and productivity were less affected, updating service lives more regularly was deemed important for accurate national accounts.

1. Review of Bobbio, Iommi, &
Tartaglia-Polcini
“New Evidence on Service Lives...”
Barbara M. Fraumeni
China Center for Human Capital and Labor Market Research
Central University of Finance and Economics, Beijing, China
National Bureau of Economic Research, Cambridge, MA USA

2. Are Italian OM&E Service Lives Accurate?
Does It Make a Difference?
(Considering Changes in Related Assumptions as well.)
Survey of service lives (SL) for Other
Machinery & Equipment (OM&E)
Current and expected (future) SL
Impact of alternative assumptions on
underlying series stock series
Impact on aggregates
Capital service flow (SF)
TFP
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3. When Were Istat OM&E SL Values Set?
1990: SL for Furniture & Further OM&E
2000: Hardware & Communication
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4. Survey & Sample
Convenience sample
359 user firms
78 Producers
SL – time until not used because of
Obsolescence
Sold abroad
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5. Impact on Underlying Series
Alternative retirement patterns
Normal
Lognormal
Weibull
Istat truncated normal distribution shape
Conclusion
Lognormal shape does best
Normal fit could not be rejected
Test of Istat truncation pattern rejects it
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6. Istat SL vs. Survey SL for Existing Assets
Survey service lives are almost 4 years shorter than
the 1990/2000 adopted Istat lives (15-20%) for total
OM&E
Two variations of computations
Standard asset aggregations
Hardware, communications, furniture & further OM&E
By user sector
Industry excl. construction, manu., services, & further OM&E
Istat and survey SL are quite close for
communications
Biggest differences are for services & construction
Discussant comment now:
Suggests composition effect
Yet, all Istat SL by user sector are 16.5
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7. Total OM&E, Survey Age at Discard
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8. Survey Forecast of Future SL
Numerical and qualitative results indicate a
forecasted declining trend over time
Manufacturing and industry excl. construction
user sector firms expected SL declines in 1 year
range, but services SL expected to increase by 1.6
Construction user sector firms expected a .6 SL
decline
By standard asset aggregations, users forecast
very small changes, except for hardware (.6
decrease in SL)
For total OM&E actually a .1 increase in SL
expected by users
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9. Impact of Revising SL
Net (wealth) capital stock (NCS)
Downward revision for all asset classes
& sectors, except communication
In 2011 services & construction net
stock decreases by over 35%
Services net stock sector share drops
from 35% to 28%
Small impact on capital service flows (SF)
TFP impact is negligible
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10. Declining SL Exercises – 10 year asset
1) Disc Purc
Before 1997, constant
Then decreased linearly to be equal for
new assets to expected future survey
value in 2007
For new assets, constant after 2007
2) Istat Disc Purc
Istat value up until year when Istat SL set
Then did the decreased linear exercise
until, and after 2007
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11. Declining SL Exercise Conclusions
Noticeable effect on cum. growth rates
OM&E NCS & SF 1990-2011
Both a decrease from about Istat 57%
Of about 15 ppts for exercise 1
Of about 20 ppts for exercise 2
Aggregate SF less, not surprising, both
a decrease from about 65%
Of 8 ppts for exercise 1
Of 21ppts for exercise 2
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12. Declining SL Exercise Conclusions
Noticeable change in OM&E SF &
aggregate TFP growth rates for 2007-
11 exercise 1
OM&E SF growth rate changes from a
positive 1.0% to a negative .9%
TFP increases by .3 percentage points
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13. Negligible Impact on Series
Alternative age/efficiency patterns
Istat hyperbolic with b =.5 for furniture, b
= .75 hardware & communication
equipment
Other hyperbolic alternatives
Linear
Constant (one-hoss-shay)
Geometric
Rate of return set exogenously = 4%
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14. Additional Paper Concluding Remarks
Results suggest that the high K/L ratio may be
due to a positive bias in the estimation of the
capital stock
Switching from Istat SL to survey estimates of
2011 SL:
Although the cumulative growth rates do not seem to
be affected, the OM&E capital stock exhibits stronger
pro-cyclicality
Paper shows the importance of regularly
updating service lives
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15. Discussant Comments
Including age of exported OM&E assets in the
total SL
Winfrey skewed retirement distributions
Cohort approach with use of hyperbolic with
different SL or a profile imitating the same
Cliff discussion vs. assets being intrinsically
different from the beginning (cliff vs. cohort
approach)
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16. Cohort or Cliff Approach
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5 10 15
Service Life
5 10 15
Service Life

17. Discussant Comments
Convenience sample….not a random sample?
of a bit more than a tenth of Invid sampled
firms
Emphasis on NCS(wealth) stock when PCS
enters SF and TFP
Nominal value of included OM&E capital and
SF in Italian total capital and total inputs
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18. Discussant Comments
Most countries rarely update their SL
A big problem
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