Constrained-Efficient Capital Reallocation

Andrea Lanteri and Adriano Rampini

No 15690, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D51 E22 E44 G31 H21 (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Constrained-Efficient Capital Reallocation (2023)
Working Paper: Constrained-Efficient Capital Reallocation (2021)
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