Working Paper: CEPR ID: DP17864
Authors: Olivier Darmouni; Andrew Sutherland
Abstract: We examine how fixed capital supply shocks affect firms’ investment. Using equipment transaction-level data, we find pandemic-driven production disruptions significantly altered capital reallocation patterns across firms. A surge in used capital trading activity softened the investment decline, as firms acquired used capital from distant and dissimilar counterparts. Younger firms were disproportionately affected even though they rarely purchase new capital: while in normal times older firms sell their capital to younger firms, following a supply shock, older firms compete for used capital, pricing out younger firms. Our evidence highlights the crucial role of secondary markets and distributive externalities for corporate investment.
Keywords: investment; capital reallocation; secondary markets; SMEs; supply chains; COVID-19
JEL Codes: G31; G32; E22; E23; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fixed capital supply shocks (E22) | firms' investment decisions (D25) |
| labor strike at John Deere (J52) | significant price increases in used equipment (P22) |
| pandemic-driven production disruptions (F69) | alteration in capital reallocation patterns (F32) |
| alteration in capital reallocation patterns (F32) | younger firms disproportionately affected by increased competition for used capital (D25) |
| increased competition for used capital (E22) | decline in total investment by younger firms (D25) |
| older firms competing for used capital (D25) | pricing out younger firms (L26) |