Capital Pledgeability and Credit Misallocation

This paper examines how heterogeneous capital pledgeability shapes capital allocation. I first document, using French firm-level data, that firms holding more pledgeable capital are structurally more leveraged and display greater sensitivity of investment to credit supply shocks. I then incorporate heterogeneous capital pledgeability into a general equilibrium model with collateral constraints. This feature creates sectoral capital misallocation: high-pledgeability capital is less costly to accumulate and thus yields lower expected returns than low-pledgeability capital, both in steady state and in response to credit supply shocks. I estimate the model based on a simple distinction between commercial real estate and other types of capital goods, the former being more pledgeable. I then show that capital misallocation is substantial over the credit cycle. Because these capital goods are imperfect substitutes and firms face a unique interest rate, redistributive credit policies taxing debt issued by high-pledgeability firms while subsidizing that of less pledgeable firms raise welfare, particularly when implemented during a credit expansion.