Constrained-Efficient Capital Reallocation
American Economic Review
vol. 113,
no. 2, February 2023
(pp. 354-95)
Abstract
We characterize efficiency in an equilibrium model of investment and capital reallocation with heterogeneous firms facing collateral constraints. The model features two types of pecuniary externalities: collateral externalities, because the resale price of capital affects collateral constraints, and distributive externalities, because buyers of old capital are more financially constrained than sellers, consistent with empirical evidence. We prove that the stationary equilibrium price of old capital is inefficiently high because the distributive externality exceeds the collateral externality, by a factor of two when we calibrate the model. New investment reduces the future price of old capital, providing a rationale for new-investment subsidies.Citation
Lanteri, Andrea, and Adriano A. Rampini. 2023. "Constrained-Efficient Capital Reallocation." American Economic Review, 113 (2): 354-95. DOI: 10.1257/aer.20210902Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
- D62 Externalities
- E22 Investment; Capital; Intangible Capital; Capacity
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill