The Market for Used Capital: Endogenous Irreversibility and Reallocation Over the Business Cycle

Abstract

Capital reallocation is procyclical in the data, but countercyclical in standard businesscycle models. To solve this puzzle, I build a model of endogenous partial irreversibility, with heterogeneous firms facing aggregate and idiosyncratic productivity shocks. Used investment goods are imperfect substitutes for new ones because of firm-level capital specificity. The price of used capital responds to aggregate shocks, leading to equilibrium real-option effects on investment and reallocation. The model generates procyclical capital reallocation and procyclical price of used capital, consistent with new industrylevel evidence I present, and provides a microfoundation for both micro and macro capital adjustment costs.

Uncertainty and Monetary Policy During Extreme Events

“…Hence, large(r) adjustment costs can work in favor of magnifying the reaction of investment to a jump in uncertainty. 28 Our evidence lines up with that in Lanteri (2018) and Dibiasi (2018), who propose evidence consistent with a countercyclical degree of reallocation frictions.…”

Uncertainty and Monetary Policy in Good and Bad Times: A Replication of the VAR Investigation by Bloom (2009)

“…Our paper, which deals with Bloom's (2009) medium-scale VAR, shows that Bloom's (2009) results are: i) replicable; ii) robust to working with non-dichotomic uncertainty indicators; ii) robust to working with nonlinear frameworks. This result can easily be interpreted in light of the "wait-and-see" transmission channel studied by Bloom (2009), Bloom, Floetotto, Jaimovich, Saporta-Eksten, and Terry (2018), Lanteri (2018), Dibiasi (2018).…”

“…Interestingly, prices display a more persistent departure from their trend in both states. Importantly, the relatively lower e¤ectiveness of systematic monetary policy in recessions can be interpreted in the light of models formalizing the "wait-and-see" behavior by …rms which, under uncertainty, optimally cut on their capital and labor demand and wait until uncertainty vanishes before resuming their normal level of production (Bloom (2009), Bloom, Floetotto, Jaimovich, Saporta-Eksten, and Terry (2018)), and of models that allow for statedependent non convex adjustment costs (Lanteri (2018), Dibiasi (2018)).…”

“…Such model represents a key reference for the construction of more complex, general equilibrium frameworks (e.g., Bloom, Floetotto, Jaimovich, Saporta-Eksten, and Terry (2018), Lanteri (2018), Dibiasi (2018)). At the same time, the empirical literature, typically using small-scale VARs, has found that the real e¤ects of uncertainty shocks are particularly acute in recessions (see Caggiano, Castelnuovo, and Groshenny (2014), Nodari (2014), Caggiano, Castelnuovo, and Pellegrino (2017), Caggiano, Castelnuovo, and Figueres (2017), Ferrara and Guérin (2018), and Chatterjee (2019)).…”

Financing Durable Assets

“…8 Eisfeldt and Rampini (2006) show that trade in used capital, which is part of capital reallocation which they define more broadly, is procyclical and provide a calibrated model with countercyclical reallocation frictions to match this basic fact. Lanteri (2016) shows that the relative price of used capital is procyclical and proposes a model in which new and used capital are imperfect substitutes consistent with this property. 9 Relatedly, Bond (1983) studies trade in used equipment in a model with heterogeneous firms which differ in terms of factor prices and utilization rates.…”