New or used? Investment with credit constraints

Eisfeldt, Andrea L.; Rampini, Adriano A.

doi:10.1016/j.jmoneco.2007.06.030

Cited by 75 publications

(46 citation statements)

References 54 publications

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“…Ramey and Shapiro (2001) document that used capital sells at substantial discounts in data from aerospace plant closings. Eisfeldt and Rampini (2007) show that smaller and more constrained firms purchase substantially more used capital in U.S. census data on new and used capital expenditures.…”

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confidence: 93%

“…In contrast, in Hart and Moore's (1994) definition durability only affects the collateral value and not the value in use, which we think is a more appropriate definition for pledgeability than durability. Also closely related is Eisfeldt and Rampini (2007) who study the choice between new and used capital. They argue that used capital is cheaper up front but requires ex-post maintenance costs which makes used capital attractive for constrained borrowers in an economy with collateral constraints.…”

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confidence: 99%

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Financing Durable Assets

Rampini¹

2016

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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.

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confidence: 93%

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Financing Durable Assets

Rampini¹

2016

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“…The role of the holding cost is to generate a reasonable scrappage age. 12 The preference parameter θ is distributed in the population according to the non-degenerate c.d.f. 8 In our counterfactuals, we consider two scenarios for supply: 1) a perfectly elastic supply, as in a perfectly competitive industry with constant marginal cost equal to p 0 ; and 2) a perfectly inelastic (per-period) supply equal to x.…”

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confidence: 99%

“…This is a straightforward extension that we omit from the main analysis to avoid cumbersome notation. 12 For scrappage decisions the only relevant holding costs are those for cars close to the scrappage age.…”

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confidence: 99%

A Quantitative Analysis of the Used-Car Market

Gavazza

Lizzeri

Roketskiy

2014

American Economic Review

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We quantitatively investigate the allocative and welfare effects of secondary markets for cars. An important source of gains from trade in these markets is the heterogeneity in the willingness to pay for higher-quality (newer) goods, but transaction costs are an impediment to instantaneous trade. Calibration of the model successfully matches several aggregate features of the U.S. and French used-car markets. Counterfactual analyses show that transaction costs have a large effect on volume of trade, allocations, and the primary market. Aggregate effects on consumer surplus and welfare are relatively small, but the effect on lower-valuation households can be large. * We are grateful to Chad Syverson, four anonymous referees and the editor, and many seminar audiences for insightful comments, and to Alistair Wilson for excellent research assistance. NSF support is gratefully acknowledged. The authors acknowledge the use of the UCL Legion High Performance Computing Facility (Legion@UCL), and associated support services, in the completion of this work.

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“…This result is driven by the feature of the textbook DMP model that the flows of benefits from forming a match are very short-lived, with a (Macaulay) duration of two to three months, and is reminiscent of standard results in corporate finance that a tightening of credit has little impact on short-lived investments. (See, for example, Eisfeldt and Rampini (2007) and the references therein. )…”

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confidence: 99%

Debt Constraints and Employment

Midrigan¹,

Pastorino²,

Kehoe³

2016

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During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumer-side credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession. A data appendix is available at http://www.nber.org/data-appendix/w22614A popular view of the [2007][2008][2009] Great Recession in the United States is that large disruptions in the credit market played a critical role in generating the observed drop in output and employment. This view is motivated in part by the regional patterns documented in recent work by several authors. Sufi (2011, 2014) showed that regions of the Unites States with the largest declines in household debt and housing prices also experienced the largest declines in consumption and employment, especially nontradable employment. Beraja, Hurst, and Ospina (2016) showed that wages were moderately flexible in that they fell across regions almost as much as employment did. Finally, Giroud and Mueller (forthcoming) showed that employment fell the most in firms that were facing the worst credit conditions.Motivated by these facts, we investigate the interplay between credit and labor market frictions, and how this interplay may have accounted for the Great Recession, by developing a version of the Diamond-Mortensen-Pissarides (DMP, henceforth) model with risk-averse agents, borrowing constraints, and human capital accumulation.In the DMP model, hiring workers is an investment activity in that costs are paid up front, whereas benefits accrue gradually. As with any investment activity, the amount of such investments falls after a credit tightening, leading to a drop in employment. Although this force is present in any dynamic search model, the drop in employment following a tightening of credit is minuscule in the textbook version of the DMP model without human capital accumulation. This result is driven by the feature of the textbook DMP model that the flows of benefits from forming a match are very short-lived, with a (Macaulay) duration of two to three months, and is reminiscent of standard results in corporate fina...

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New or used? Investment with credit constraints

Cited by 75 publications

References 54 publications

Financing Durable Assets

Financing Durable Assets

A Quantitative Analysis of the Used-Car Market

Debt Constraints and Employment

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