The Market for Used Capital: Endogenous Irreversibility and Reallocation Over the Business Cycle
54 Pages Posted: 19 Feb 2016
Date Written: January 17, 2016
Capital reallocation is procyclical in the data, but countercyclical in standard business-cycle 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 industry-level evidence I present, and provides a microfoundation for both micro and macro capital adjustment costs.
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