Reallocating and Pricing Illiquid Capital: Two Productive Trees

47 Pages Posted: 23 Aug 2011

See all articles by Neng Wang

Neng Wang

Columbia University; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Janice C. Eberly

Northwestern University - Kellogg School of Management

Date Written: November 18, 2010

Abstract

We develop a two sector general equilibrium model with capital accumulation and convex adjustment costs. We use the model to study capital asset pricing and reallocation, as well as optimal consumption and investment decisions. With two sectors, the consumer balances diversification against the potential productivity and efficiency gains of investing more heavily in one sector. The general framework nests and ex-tends standard equilibrium macro-asset pricing models. We show conditions under which aggregates are immune to the distribution of capital and in contrast, when the distribution becomes crucial for both sectoral and aggregate values. Applications of the framework highlight the importance of heterogeneity and capital liquidity - the ability to reallocate capital - for economic growth and asset pricing. Misallocated capital creates risk and reduces utility, but correcting it through capital reallocation reduces efficiency and growth.

Keywords: capital asset pricing, reallocation

JEL Classification: G00

Suggested Citation

Wang, Neng and Eberly, Janice C., Reallocating and Pricing Illiquid Capital: Two Productive Trees (November 18, 2010). Columbia Business School Research Paper , Available at SSRN: https://ssrn.com/abstract=1915332 or http://dx.doi.org/10.2139/ssrn.1915332

Neng Wang (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Janice C. Eberly

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1840 (Phone)
847-491-5719 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
69
Abstract Views
661
rank
390,408
PlumX Metrics