A Search-Based Neoclassical Model of Capital Reallocation

28 Pages Posted: 28 Aug 2018 Last revised: 21 Feb 2019

See all articles by Feng Dong

Feng Dong

Tsinghua University - School of Economics and Management

Pengfei Wang

Peking University HSBC Business School

Yi Wen

Federal Reserve Bank of St. Louis - Research Department; Tsinghua University

Date Written: 2018-08-01

Abstract

As a form of investment, the importance of capital reallocation between firms has been increasing over time, with the purchase of used capital accounting for 25% to 40% of firms total investment nowadays. Cross- firm reallocation of used capital also exhibits intriguing business-cycle properties, such as (i) the illiquidity of used capital is countercyclical (or the quantity of used capital reallocation across rms is procyclical), (ii) the prices of used capital are procyclical and more so than those of new capital goods, and (iii) the dispersion of firms' TFP or MPK (or the bene t of capital reallocation) is countercyclical. We build a search-based neoclassical model to qualitatively and quantitatively explain these stylized facts. We show that search frictions in the capital market are essential for our empirical success but not sufficient---fi nancial frictions and endogenous movements in the distribution of rm-level TFP (or MPK) and interactions between used-capital investment and new investment are also required to simultaneously explain these stylized facts, especially that prices of used capital are more volatile than that of new investment and the dispersion of firm TFP is countercyclical.

Keywords: Capital Reallocation, Capital Search, Fragmented Markets, Endogenous Dispersion of rmsTFP, Endogenous Total Factor Productivity, Business Cycles

JEL Classification: E22, E32, E44, G11

Suggested Citation

Dong, Feng and Wang, Pengfei and Wen, Yi, A Search-Based Neoclassical Model of Capital Reallocation (2018-08-01). FRB St. Louis Working Paper No. 2018-17, Available at SSRN: https://ssrn.com/abstract=3239785 or http://dx.doi.org/10.20955/wp.2018.017

Feng Dong (Contact Author)

Tsinghua University - School of Economics and Management ( email )

School of Economics and Management
Tsinghua University
Beijing, Beijing 100084
China

HOME PAGE: http://fengdongecon.weebly.com

Pengfei Wang

Peking University HSBC Business School ( email )

Yi Wen

Federal Reserve Bank of St. Louis - Research Department ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8559 (Phone)
314-444-8731 (Fax)

Tsinghua University ( email )

Beijing, 100084
China

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