url
13
Feb
2015

DISPLACED CAPITAL: Theoretical Framework

Allowing for capital specificity may also shed light on worker reallocation. Nadiri and Rosen (1969) demonstrated the importance of spillover effects of adjustment costs of one factor of production onto the behavior of another. If job creation and destruction are intimately linked with capital creation and destruction, then consideration of the specificity of capital may increase our understanding of the results of Davis and Haltiwanger (1990, 1992). Moreover, slow capital mobility may change the predicted effects of sectoral shocks. The lack of positive comovement between unemployment and vacancies has been taken as evidence against the hypothesis that sectoral shifts are an important contributor to aggregate fluctuations (e.g. Abraham and Katz (1986), Blanchard and Diamond (1989)). If, however, capital is required to create a vacancy, then a sectoral shift may not manifest itself as an increase in vacancies in the short-run. http://www.speedy-payday-loans.com/

Our work is related to a growing empirical literature that demonstrates the importance of considering the costs of disinvestment. Caballero and Engel (1994) (using industry-level data), Abel and Eberly (1996) (using firm-level data), Caballero, Engel and Haltiwanger (1995) (using establishment-level data), and Goolsbee and Gross (1997) (using aircraft model data) all provide evidence that the behavior of investment is consistent with the presence of important nonconvexities in the adjustment cost function.

Pulvino’s (1996a,b) analysis of the effect of credit constraints and bankruptcy court protection on asset sales provides further insights into the costs of disinvestment. Using data on the sales of aircraft by commercial airlines, he finds that capital-constrained airlines sell their aircraft at relatively lower prices than airlines that are not constrained. Our empirical work provides further evidence for costs of disinvestment. In addition, our theoretical model offers a plausible interpretation of our empirical findings, as well as of other findings in the literature.

Theoretical Framework

Overview

We consider the following story to be a plausible depiction of the market for used capital. Most capital is specialized by industry, so that used capital typically has greater value inside the industry than outside the industry. Even within an industry, though, capital from one firm may not be a perfect match for another firm. Thin markets and costly search complicate the process of finding buyers whose needs best match the capital’s characteristics. The cost of search includes not only monetary costs, but also the time it takes to find good matches within the industry. As a result, firms will not search exhaustively for the best match for all their pieces of capital. Firms with high discount factors may resort to “fire-sales,” resulting in significantly inferior matches and the reallocation of capital to low valued uses.

Allowing for capital specificity may also shed light on worker reallocation. Nadiri and Rosen (1969) demonstrated the importance of spillover effects of adjustment costs of one factor of production onto the behavior of another. If job creation and destruction are intimately linked with capital creation and destruction, then consideration of the specificity of capital may increase our understanding of the results of Davis and Haltiwanger (1990, 1992). Moreover, slow capital mobility may change the predicted effects of sectoral shocks. The lack of positive comovement between unemployment and vacancies has been taken as evidence against the hypothesis that sectoral shifts are an important contributor to aggregate fluctuations (e.g. Abraham and Katz (1986), Blanchard and Diamond (1989)). If, however, capital is required

About The Author

Kevin J. Brandon

Home | Site Map | Contacts

Copyright © 2013 - 2019 Investment And Finance Online. All rights reserved