DP15690 Constrained-Efficient Capital Reallocation

Author(s): Andrea Lanteri, Adriano A. Rampini
Publication Date: January 2021
Date Revised: June 2021
Keyword(s): capital reallocation, Collateral, constrained efficiency, Investment Subsidies, Pecuniary externalities
JEL(s): D51, E22, E44, G31, H21
Programme Areas: Financial Economics, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15690

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.