Working Paper: CEPR ID: DP15690
Authors: Andrea Lanteri; Adriano A. Rampini
Abstract: We characterize efficiency in an equilibrium model of investment and capital reallocation with heterogeneous firms facing collateral constraints. The model features two types of pecuniary externalities: collateral externalities, because the resale price of capital affects collateral constraints, and distributive externalities, because buyers of old capital are more financially constrained than sellers, consistent with empirical evidence. We prove that the stationary-equilibrium price of old capital is inefficiently high, because the distributive pecuniary externality exceeds the collateral externality, by a factor of two in our calibrated model. New investment reduces the future price of old capital, providing a rationale for new-investment subsidies.
Keywords: capital reallocation; pecuniary externalities; collateral constrained efficiency; investment subsidies
JEL Codes: E22; E44; D51; G31; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| collateral constraints (D10) | level of aggregate investment (E22) |
| collateral constraints (D10) | capital allocation across firms (G32) |
| distributive pecuniary externality (D62) | equilibrium resale price of capital (D33) |
| collateral externality (D62) | equilibrium resale price of capital (D33) |
| new investment (E22) | future price of old capital (G12) |
| future price of old capital (G12) | financially constrained firms (G32) |
| new investment subsidies (E22) | efficient allocation (D61) |