DEPRECIATION AND CAPITAL-INVESTMENT DECISIONS - EXPERIMENTAL-EVIDENCEIN A GOVERNMENTAL SETTING

This study tested the premise that depreciation may serve as a cogniti ve reminder to decision-makers in governmental organizations of the ne ed to replace long-lived assets as they physically deteriorate. This p remise is grounded in recent work on melioration theory, which suggest s that individuals tend to maximize current benefits at the cost of un derweighting negative long-run consequences of current decisions. In t his framework, the present research addresses whether depreciation cue s have a mitigating effect on melioration bias. Subjects (n = 216) wer e randomly assigned to one of twelve cells in a computerized between-s ubjects laboratory experiment with monetary incentives. The experiment al cells represent twelve possible combinations relating to two levels of depreciation, the presence or absence of historical data on past d ecisions, and three levels of initial expenditures. The task required subjects to allocate a governmental budget between current and capital expenditures over multiple periods. A governmental context was used b ecause of its relevance to the current controversy over the role of de preciation in governments and other nonbusiness entities. The study fo und a significant interaction between depreciation and historical info rmation, a relationship which is consistent with the contention that d epreciation is a useful cognitive surrogate for explicit information o n prior period capital expenditures.