Renting for Development

Robert Townsend and Adriano Rampini
Additional contact information
Robert Townsend: MIT

No 1296, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study the role of rental markets in the development context. We argue that renting is a form of collateralized financing that allows financially constrained households to deploy more assets. We provide a dynamic model in which households can rent or buy the capital assets required for production. Households can borrow against assets they own and the cost of collateralizing loans is increasing in leverage. Renting allows higher leverage due to a repossession advantage as the financier retains ownership. The model predicts that more financially constrained households choose higher leverage and rent more capital assets. Using unique panel data on households in a developing economy, we show that renting is a quantitatively important mode of financing. Households with low net worth rent more and borrow more both in the cross section and within household over time, consistent with our theory. These cross-sectional patterns in rentals obtain for equipment and land & structures. In terms of levels, households with low net worth rent most of the equipment they deploy; in contrast, the level of renting of land and structures seems low relative to developed economies. In our view, rental market development deserves attention similar to the one received by financial market development.

Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2016/paper_1296.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1296

Access Statistics for this paper

More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().