Constrained-Efficient Capital Reallocation
Andrea Lanteri, Adriano A. Rampini
American Economic Review · 2023 · Volume 113 · Issue 2
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.
Keywords
Firm Behavior: Theory, Production, Cost, Capital, Total Factor, and Multifactor Productivity, Capacity, Intertemporal Firm Choice: Investment, and Financing, Externalities, Investment, Intangible Capital, Capital Budgeting, Fixed Investment and Inventory Studies, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
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