New and Used Capital
AbstractThis paper studies the choice between investment in new and used capital. We argue that used capital inherently relaxes credit constraints and thus firms which are more credit constrained invest more in used capital. Used capital is cheap relative to new capital in terms of its purchase price but requires substantial maintenance payments later on. This timing of investment cash outflows however makes used capital attractive for more credit constrained firms. We provide an overlapping generations model and determine the price of used capital in equilibrium. Agents with less internal funds are more credit constrained, invest in used capital, and start smaller firms. Empirically, we find that the fraction of investment in used capital is substantially higher for small firms. While used capital is more expensive when evaluated using the stochastic discount factor of an agent with lots of internal funds, it is actually cheaper when evaluated from the vantage point of a credit constrained agent with few internal funds. Our results shed light on the choice between new and used capital, which in standard vintage capital models is determined by preferences for different vintages
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 729.
Date of creation: 2004
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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credit constraints; used capital; vintage capital;
Find related papers by JEL classification:
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
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