Constrained-Efficient Capital Reallocation

Andrea Lanteri and Adriano Rampini

American Economic Review, 2023, vol. 113, issue 2, 354-95

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 externality exceeds the collateral externality, by a factor of two when we calibrate the model. New investment reduces the future price of old capital, providing a rationale for new-investment subsidies.

JEL-codes: D21 D24 D25 D62 E22 G31 G32 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Constrained-Efficient Capital Reallocation (2022)
Working Paper: Constrained-Efficient Capital Reallocation (2021)
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DOI: 10.1257/aer.20210902

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