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11
Feb
2015

DISPLACED CAPITAL: Introduction

Declining industries, worker layoffs, and factory closings are unavoidable consequences of a continuously evolving market economy. How efficiently does the market reallocate factors of production to productive uses in other sectors? Much is known about the outcomes for labor. Studies, such as those by Topel (1990), Ruhm (1991), Jacobson, LaLonde and Sullivan (1993), and Schoeni et al (1996), estimate the effects of reallocation on individual workers. They find that displaced workers often experience prolonged periods of unemployment, as well as significant losses in permanent income even after they become re-employed. These results suggest that labor market frictions, such as inefficient separations, search costs or industry-specific human capital, may be impediments to the efficient reallocation of labor.
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Relatively little is known, however, about the post-displacement outcomes for the other major factor of production – physical capital. Much capital is highly specialized, both in its embodied technology and factor substitution possibilities and in the types of products it can produce. While a substantial amount of theoretical and empirical work on investment behavior has analyzed the effects of costly reversibility on the decision to invest, little direct evidence has been offered on the efficiency with which capital is reallocated across firms and sectors.

We seek to fill this gap in the literature by providing a theory and estimates of the costs of reallocation of capital across firms and sectors. Our theory of used capital sales features specificity of capital and thinness of resale markets. We show how variations in specificity and costs of search affect the reallocation of capital.

Quantifying the costs of capital mobility is more difficult because of data availability. While several data sets, such as the Panel Study of Income Dynamics and the Displaced Workers Survey, allow one to track workers over time as they move between industries, we know of no data set that tracks physical capital as it moves between industries. Studies of depreciation, such as those by Hulten and Wykoff (1981) and Hulten, Robertson and Wykoff (1989), use transaction prices from used assets to determine rates of economic depreciation.

These data, however, do not contain information on the original purchase price, nor do they link the buyers and sellers of the assets. Bresnahan and Ramey (1993) study capital utilization and reallocation of capital across size classes in the automobile industry during the 1970s and 1980s. Much of that reallocation, though, was within firms.

Declining industries, worker layoffs, and factory closings are unavoidable consequences of a continuously evolving market economy. How efficiently does the market reallocate factors of production to productive uses in other sectors? Much is known about the outcomes for labor. Studies, such as those by Topel (1990), Ruhm (1991), Jacobson, LaLonde and Sullivan (1993), and Schoeni et al (1996), estimate the effects of reallocation on individual workers. They find that displaced workers often experience prolonged periods of unemployment, as well as significant losses in permanent income even after they become re-employed. These results suggest that labor market frictions, such as inefficient separations, search costs or industry-specific human capital, may be impediments to the efficient reallocation of labor. Our lending company is

About The Author

Kevin J. Brandon

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