New or used? Investment with credit constraints

Journal Article (Journal Article)

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. © 2007 Elsevier B.V. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Eisfeldt, AL; Rampini, AA

Published Date

  • November 1, 2007

Published In

Volume / Issue

  • 54 / 8

Start / End Page

  • 2656 - 2681

International Standard Serial Number (ISSN)

  • 0304-3932

Digital Object Identifier (DOI)

  • 10.1016/j.jmoneco.2007.06.030

Citation Source

  • Scopus