Working Paper: NBER ID: w28384
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; collateral constraints; pecuniary externalities
JEL Codes: D51; E22; E44; 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) | Inefficiently high equilibrium resale price of capital (D59) |
| Inefficiently high equilibrium resale price of capital (D59) | Distort level of aggregate investment and allocation of capital across firms (E22) |
| Lower price of old capital (G19) | Facilitates capital reallocation towards financially constrained firms (O16) |
| New investment (G31) | Reduces future price of old capital (D25) |
| Reduces future price of old capital (D25) | Creates positive externality for constrained firms who are net buyers of old capital (D22) |
| Constrained-efficient allocation (D61) | Allows financially constrained firms to produce at a larger scale (D25) |