url
12
Feb
2015

DISPLACED CAPITAL: Introduction 2


Thus, to answer these questions it was necessary to construct a new data set. We collected confidential information from auctions of equipment from three large Southern California aerospace plants that discontinued operations. We then used information on sales prices and the characteristics of buyers to determine the extent of capital mobility for this particular industry. We will argue below that the aerospace industry is particularly interesting because it has undergone significant downsizing. review

Our findings suggest that capital is very specialized by sector and that reallocating capital across sectors entails real costs. For example, we find that capital crossing industries sold for a greater discount than capital that remained in the aerospace industry. Furthermore, the process of winding down operations before selling the capital resulted in significant periods of underutilization before the capital was finally sold. Thus, there also appears to be a time cost to restructuring. On the other hand, the assumption of zero fungibility of capital is also far from true. We find that capital is sold to firms in a wide range of sectors as well as in far-flung geographical locations.

Recognizing sectoral specificity of capital has the potential to shed light on numerous theoretical and empirical issues. The trade theory literature has a long history of analyzing the effects of changes in the terms of trade under the assumption of imperfect capital mobility.1 Similarly, in the explosion of work on growth theory in the 1960s, a number of papers addressed vintage capital, variation in the elasticity of substitution, and the macroeconomics of multiple sectors (e.g. Stiglitz and Uzawa (1969)).

Most dynamic stochastic general equilibrium macroeconomic models, on the other hand, assume that capital is perfectly malleable and can be costlessly shifted across firms and sectors.2 Only recently have macroeconomic models begun to incorporate some specificity of capital, such as irreversibility or vintage effects.3 These models show that incorporation of heterogeneous capital can significantly change the economic predictions of standard models.

Thus, to answer these questions it was necessary to construct a new data set. We collected confidential information from auctions of equipment from three large Southern California aerospace plants that discontinued operations. We then used information on sales prices and the characteristics of buyers to determine the extent of capital mobility for this particular industry. We will argue below that the aerospace industry is particularly interesting because it has undergone significant downsizing. review Our findings suggest that capital is very specialized by sector and that reallocating capital across sectors entails real costs. For example, we find that capital crossing industries sold for a greater discount than capital that remained in the aerospace industry. Furthermore, the process of winding down operations

About The Author

Kevin J. Brandon

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