The effects of land price on the quality of capital and maulti-factor productivity

I study a model of replacement problem with liquidity constraint, where the land is used as a collateral as well as a factor of production. The collateral value of the land restricts the available funds for the firm, which works as a capacity constraint of firms. Due to this constraint, the replacement can be enhanced when the positive technology and/or demand shocks arrives. This stands in contrast with some types of replacement models, where the positive demand shocks delay the replacement. The rise of the land price enlarges the available funds for the firms which requires the efficient use of the land, when the firms are under liquidity constraint. It also raises the user’s cost of land, hence, the replacement of machine is enhanced. The effects of the land price on the the multi-factor productivity and replacement are examined by the data of Japan during 1970 and 1998. The estimated results show that the rise of the land price enhance the replacement and improves the multi-factor productivity in the non-service sectors, but I do not observe the direct relationship between the replacement and the land price in the service sectors. These results are consistent with the view that the land price affects the replacement decisions and productivity in non-service sectors. In service sectors, however, the other factors such as the quality of investments could be important.