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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.

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  • 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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    References listed on IDEAS

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    Cited by:

    1. Adriano Rampini, 2015. "Financing Durable Assets," 2015 Meeting Papers 915, Society for Economic Dynamics.
    2. Samaniego, Roberto & Sun, Juliana, 2016. "Gray's Anatomy: Understanding Uncertainty," MPRA Paper 72787, University Library of Munich, Germany.
    3. Samaniego, Roberto, 2016. "The Embodiment Controversy: on the Policy Implications of Vintage Capital models," MPRA Paper 73348, University Library of Munich, Germany.
    4. Wei Cui, 2017. "Macroeconomic Effects of Delayed Capital Liquidation," Discussion Papers 1719, Centre for Macroeconomics (CFM).
    5. Matthias Kehrig & Nicolas Vincent, 2017. "Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Planet-Level Data," CESifo Working Paper Series 6401, CESifo Group Munich.
    6. Junghoon Lee, 2016. "Technological Change and Reallocation," Emory Economics 1604, Department of Economics, Emory University (Atlanta).

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