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Financing Durable Assets

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  • Adriano A. Rampini

Abstract

This paper studies how the durability of assets affects financing. We show that more durable assets require larger down payments making them harder to finance, because durability affects the price of assets and hence the overall financing need more than their collateral value. Durability affects technology adoption, the choice between new and used capital, and the rent versus buy decision. Constrained firms invest in less durable assets and buy used assets. More durable assets are more likely to be rented. Economies with weak legal enforcement invest more in less durable, otherwise dominated assets and are net importers of used assets.

Suggested Citation

  • Adriano A. Rampini, 2019. "Financing Durable Assets," American Economic Review, American Economic Association, vol. 109(2), pages 664-701, February.
  • Handle: RePEc:aea:aecrev:v:109:y:2019:i:2:p:664-701
    Note: DOI: 10.1257/aer.20170995
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    Cited by:

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    2. Nusrat Jahan, 2020. "Does Asset Durability Impede Financing? An Empirical Assessment," Carleton Economic Papers 20-17, Carleton University, Department of Economics, revised 07 Aug 2022.
    3. Ma, Song & Murfin, Justin & Pratt, Ryan, 2022. "Young firms, old capital," Journal of Financial Economics, Elsevier, vol. 146(1), pages 331-356.
    4. Lee, Kyeong Hun & Mauer, David C. & Xu, Emma Q., 2022. "Selling durables: Financial flexibility for limited cost pass-through," Journal of Corporate Finance, Elsevier, vol. 75(C).
    5. Vittorio Bassi & Raffaela Muoio & Tommaso Porzio & Ritwika Sen & Esau Tugume, 2022. "Achieving Scale Collectively," Econometrica, Econometric Society, vol. 90(6), pages 2937-2978, November.
    6. Alessandro Gavazza & Andrea Lanteri, 2021. "Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets [“Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies”]," Review of Economic Studies, Oxford University Press, vol. 88(6), pages 2935-2969.
    7. Grundy, Bruce D. & Verwijmeren, Patrick, 2020. "The external financing of investment," Journal of Corporate Finance, Elsevier, vol. 65(C).
    8. Mense, Andreas, 2021. "Secondary housing supply," FAU Discussion Papers in Economics 05/2021, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    9. Andrea Lanteri & Adriano A. Rampini, 2023. "Constrained-Efficient Capital Reallocation," American Economic Review, American Economic Association, vol. 113(2), pages 354-395, February.
    10. Daniel Green & Brian T. Melzer & Jonathan A. Parker & Arcenis Rojas, 2020. "Accelerator or Brake? Cash for Clunkers, Household Liquidity, and Aggregate Demand," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 178-211, November.
    11. Liu, Xiaoling & Wu, Yuhui & Zhang, Huan, 2023. "Collateral-based monetary policy and corporate employment: Evidence from Medium-term Lending Facility in China," Journal of Corporate Finance, Elsevier, vol. 78(C).
    12. Krainer, Robert E., 2023. "Financial contracting as behavior towards risk: The corporate finance of business cycles 8/3/22," Journal of Financial Stability, Elsevier, vol. 65(C).
    13. Edoardo M. Acabbi & Ettore Panetti & Alessandro Sforza, 2019. "The Financial Channels of Labor Rigidities: Evidence from Portugal," GEE Papers 0138, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Dec 2019.
    14. Livdan, Dmitry & Nezlobin, Alexander, 2021. "Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric," LSE Research Online Documents on Economics 108639, London School of Economics and Political Science, LSE Library.
    15. Edoardo M. Acabbi & Ettore Panetti & Alessandro Sforza, 2019. "The Financial Channels of Labor Rigidities: Evidence from Portugal," GEE Papers 0138, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Dec 2019.
    16. Mufaddal Baxamusa & Saima Javaid & Khadija Harery, 2016. "Why do Firms Purchase Used Assets?," International Review of Finance, International Review of Finance Ltd., vol. 16(2), pages 243-264, June.

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    More about this item

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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