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The Market for Used Capital: Endogenous Irreversibility and Reallocation over the Business Cycle

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Listed author(s):
  • 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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File URL: https://economicdynamics.org/meetpapers/2013/paper_608.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 608.

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Date of creation: 2013
Handle: RePEc:red:sed013:608
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
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  4. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
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  8. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 391-415.
  9. Aubhik Khan & Julia K. Thomas, 2008. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," Econometrica, Econometric Society, vol. 76(2), pages 395-436, 03.
  10. Vojislav Maksimovic, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, vol. 56(6), pages 2019-2065, December.
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  13. Eisfeldt, Andrea L. & Rampini, Adriano A., 2007. "New or used? Investment with credit constraints," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2656-2681, November.
  14. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  15. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
  16. Young, Eric R., 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 36-41, January.
  17. Todd C. Pulvino, 1998. "Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions," Journal of Finance, American Finance Association, vol. 53(3), pages 939-978, 06.
  18. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
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Cited by:

  1. Samaniego, Roberto & Sun, Juliana, 2016. "Gray's Anatomy: Understanding Uncertainty," MPRA Paper 72787, University Library of Munich, Germany.
  2. Samaniego, Roberto, 2016. "The Embodiment Controversy: on the Policy Implications of Vintage Capital models," MPRA Paper 73348, University Library of Munich, Germany.
  3. 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.
  4. Junghoon Lee, 2016. "Technological Change and Reallocation," Emory Economics 1604, Department of Economics, Emory University (Atlanta).
  5. Adriano Rampini, 2015. "Financing Durable Assets," 2015 Meeting Papers 915, Society for Economic Dynamics.

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