New or Used? Investment with Credit Constraints

32 Pages Posted: 16 Jan 2008

See all articles by Andrea L. Eisfeldt

Andrea L. Eisfeldt

UCLA Anderson School of Management

Adriano A. Rampini

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Abstract

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.

Keywords: Investment, used capital, financial constraints, vintage capital

JEL Classification: D92, E22, G31

Suggested Citation

Eisfeldt, Andrea L. and Rampini, Adriano A., New or Used? Investment with Credit Constraints. Journal of Monetary Economics, Vol. 54, pp. 2656-2681, 2007, Available at SSRN: https://ssrn.com/abstract=1083542

Andrea L. Eisfeldt

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

Adriano A. Rampini (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708
United States
+1 919 660-7797 (Phone)
+1 919 660-8038 (Fax)

HOME PAGE: http://faculty.fuqua.duke.edu/~rampini/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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