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Displaced Capital: A Study of Aerospace Plant Closings

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  • Valerie A. Ramey
  • Matthew D. Shapiro

Abstract

Using equipment-level data from aerospace plants that closed during the 1990s, this paper studies the process of moving installed physical capital to a new use. The analysis yields three results that suggest significant sectoral specificity of physical capital and substantial costs of redeploying the capital. First, other aerospace companies are overrepresented among buyers of the used capital relative to their representation in the market for new investment goods. Second, even after age-related depreciation is taken into account, capital sells for a substantial discount relative to replacement cost; the more specialized the type of capital, the greater the discount. Yet, capital sold to other aerospace firms fetches a higher price than capital sold to industry outsiders. Finally, the process of winding down operations and selling the equipment takes several years.

Suggested Citation

  • Valerie A. Ramey & Matthew D. Shapiro, 2001. "Displaced Capital: A Study of Aerospace Plant Closings," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 958-992, October.
  • Handle: RePEc:ucp:jpolec:v:109:y:2001:i:5:p:958-992
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    1. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    2. Iain Cockburn & Murray Frank, 1992. "Market Conditions and Retirement of Physical Capital: Evidence fron Oil Tankers," NBER Working Papers 4194, National Bureau of Economic Research, Inc.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Fuss, Melvyn & McFadden, Daniel, 1978. "Production Economics: A Dual Approach to Theory and Applications (I): The Theory of Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 1, number fuss1978.
    5. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1.
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