New or Used? Investment with Credit Constraints
Andrea L. Eisfeldt
UCLA Anderson School of Management
Adriano A. Rampini
Journal of Monetary Economics, Vol. 54, pp. 2656-2681, 2007
Used capital is cheap up front but requires higher maintenance payments later on. We argue that the timing of these investment cash outflows makes used capital attractive to financially constrained firms, since it is cheap when evaluated using their discount factor. In contrast, it may be expensive from the vantage point of an unconstrained agent. 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 and varies significantly with measures of financial constraints.
Number of Pages in PDF File: 32
Keywords: Investment, used capital, financial constraints, vintage capital
JEL Classification: D92, E22, G31Accepted Paper Series
Date posted: January 16, 2008
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