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The Market for Used Capital: Endogenous Irreversibility and Reallocation over the Business Cycle

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  • Andrea Lanteri

    (London School of Economics)

Abstract

This paper explains the procyclicality of capital reallocation documented by Eisfeldt and Rampini (2006) and Cui (2012) by endogenising the resale price of capital in a dynamic general equilibrium model with heterogeneous firms hit by aggregate and idiosyncratic productivity shocks. I build a simple theory of endogenous investment irreversibility by assuming that used investment goods are imperfect substitutes for newly produced ones because of firm-level capital specificity. This creates a downward sloping demand for used capital that shifts with aggregate shocks. In recessions, the wedge between the price of new investment goods and the resale price becomes larger, so that the option value of holding capital for unproductive firms rises and they optimally choose to sell less capital to productive firms, inducing an amplification mechanism on total output and measured Total Factor Productivity.

Suggested Citation

  • Andrea Lanteri, 2013. "The Market for Used Capital: Endogenous Irreversibility and Reallocation over the Business Cycle," 2013 Meeting Papers 608, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:608
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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