New and Used Capital

Adriano Rampini and Andrea Eisfeldt

No 729, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the choice between investment in new and used capital. We argue that used capital inherently relaxes credit constraints and thus firms which are more credit constrained invest more in used capital. Used capital is cheap relative to new capital in terms of its purchase price but requires substantial maintenance payments later on. This timing of investment cash outflows however makes used capital attractive for more credit constrained firms. We provide an overlapping generations model and determine the price of used capital in equilibrium. Agents with less internal funds are more credit constrained, invest in used capital, and start smaller firms. Empirically, we find that the fraction of investment in used capital is substantially higher for small firms. While used capital is more expensive when evaluated using the stochastic discount factor of an agent with lots of internal funds, it is actually cheaper when evaluated from the vantage point of a credit constrained agent with few internal funds. Our results shed light on the choice between new and used capital, which in standard vintage capital models is determined by preferences for different vintages

Keywords: credit constraints; used capital; vintage capital (search for similar items in EconPapers)
JEL-codes: D92 E22 (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:729

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