Financing Durable Assets
Adriano Rampini ()
No 22324, NBER Working Papers from National Bureau of Economic Research, Inc
This paper studies the effect of durability on the financing of durable assets. We show that more durable assets require larger down payments of internal funds per unit of capital making them harder to finance, because durability affects the price of an asset and hence the overall financing need more than its collateral value. This insight has implications for the choice between new and used capital, technology adoption, and the rent versus buy decision. Constrained borrowers purchase used assets which are less durable than new assets and adopt less durable, low quality assets, that are otherwise dominated technologies. More durable assets are more likely to be rented given their larger financing need. Legal enforcement affects trade and technology adoption; weak legal enforcement economies are net importers of used assets and invest a larger fraction in less durable, low quality assets. There is a critical distinction between the pledgeability and durability of assets: pledgeability facilitates financing whereas the net effect of durability is to impede financing.
JEL-codes: D24 D91 D92 E22 G32 O16 (search for similar items in EconPapers)
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Published as Adriano A. Rampini, 2019. "Financing Durable Assets," American Economic Review, vol 109(2), pages 664-701.
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Working Paper: Financing Durable Assets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:22324
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