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Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft

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  • Gavazza, Alessandro

Abstract

I construct a dynamic model of transactions in used capital to understand the role of leasing when trading is subject to frictions. Firms trade assets to adjust their productive capacity in response to shocks to profitability. Transaction costs hinder the efficiency of the allocation of capital, and lessors act as trading intermediaries who reduce trading frictions. The model predicts that leased assets trade more frequently and produce more output than owned assets, for two reasons. First, high-volatility firms are more likely to lease than low-volatility firms, since they expect to adjust their capacity more frequently. Second, ownership's larger transaction costs widen owners' inaction bands relative to lessees'. Using data on commercial aircraft, I find that leased aircraft have holding durations 38-percent shorter and fly 6.5-percent more hours than owned aircraft. Additional tests indicate that most of these differential patterns in trading and utilization arise because owners have wider inaction bands than lessees, and carriers' self-selection into leasing plays a minor role.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28821.

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Date of creation: Apr 2010
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Handle: RePEc:pra:mprapa:28821

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Keywords: Leasing; Capital Goods; Aircraft;

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Cited by:
  1. Gordon M. Phillips & Giorgo Sertsios, 2011. "How Do Firm Financial Conditions Affect Product Quality and Pricing?," NBER Working Papers 17233, National Bureau of Economic Research, Inc.
  2. Gavazza, Alessandro, 2010. "The role of trading frictions in real asset markets," MPRA Paper 25781, University Library of Munich, Germany.
  3. Myrto Kalouptsidi, 2011. "Time to Build and Shipping Prices," 2011 Meeting Papers 661, Society for Economic Dynamics.
  4. Gavazza, Alessandro, 2010. "Asset liquidity and financial contracts: Evidence from aircraft leases," Journal of Financial Economics, Elsevier, vol. 95(1), pages 62-84, January.
  5. Andrea L. Eisfeldt & Adriano A. Rampini, 2009. "Leasing, Ability to Repossess, and Debt Capacity," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1621-1657, April.
  6. Gavazza, Alessandro & Lizzeri, Alessandro & Rokestkiy, Nikita, 2012. "A quantitative analysis of the used-car market," MPRA Paper 38414, University Library of Munich, Germany.
  7. Anders, Christoph, 2010. "Auswirkungen des Leasings auf Transaktionskosten," Leasing - Wissenschaft & Praxis, Universität zu Köln, Forschungsinstitut für Leasing, vol. 8(2), pages 71-88.
  8. Gal, Peter & Pinter, Gabor, 2013. "Capital over the business cycle: renting versus ownership," Bank of England working papers 478, Bank of England.
  9. Lester, Benjamin & Rocheteau, Guillaume & Weill, Pierre-Olivier, 2014. "Competing for order flow in OTC markets," Working Papers 14-9, Federal Reserve Bank of Philadelphia.
  10. Wojahn, Oliver W., 2012. "Why does the airline industry over-invest?," Journal of Air Transport Management, Elsevier, vol. 19(C), pages 1-8.
  11. Chemmanur, Thomas & Jiao, Yawen & Yan, An, 2010. "A theory of contractual provisions in leasing," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 116-142, January.
  12. Borghan Nezami Narajabad & Cyril Monnet, 2012. "Why Rent When You Can Buy? A Theory of Repurchase Agreements," 2012 Meeting Papers 647, Society for Economic Dynamics.

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