Working Paper: NBER ID: w22324
Authors: Adriano A. Rampini
Abstract: This paper studies the effect of durability on the financing of durable assets. We show that more durable assets require larger down payments of internal funds per unit of capital making them harder to finance, because durability affects the price of an asset and hence the overall financing need more than its collateral value. This insight has implications for the choice between new and used capital, technology adoption, and the rent versus buy decision. Constrained borrowers purchase used assets which are less durable than new assets and adopt less durable, low quality assets, that are otherwise dominated technologies. More durable assets are more likely to be rented given their larger financing need. Legal enforcement affects trade and technology adoption; weak legal enforcement economies are net importers of used assets and invest a larger fraction in less durable, low quality assets. There is a critical distinction between the pledgeability and durability of assets: pledgeability facilitates financing whereas the net effect of durability is to impede financing.
Keywords: Durability; Financing; Assets; Collateral; Legal Enforcement
JEL Codes: D24; D91; D92; E22; G32; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Durability (L15) | Larger down payments of internal funds (D25) |
| Larger down payments of internal funds (D25) | Higher overall financing needs (G32) |
| Durability (L15) | Higher overall financing needs (G32) |
| Durability (L15) | Asset price (G19) |
| Asset price (G19) | Higher overall financing needs (G32) |
| Weak legal enforcement (P37) | Net importers of used assets (F29) |
| Durability (L15) | Financing ease (G32) |
| Pledgeability facilitates financing (G32) | Durability impedes financing (G32) |