Constrained-Efficient Capital Reallocation

We analyze the constrained-efficient allocation in an equilibrium model of investment and capital reallocation with heterogeneous firms facing collateral constraints. The features two types pecuniary externalities: externalities, because resale price affects firms’ ability to borrow, distributive buyers old are more financially constrained than sellers, consistent empirical evidence. show analytically quantitatively that is inefficiently high general, externality exceeds externality, by a factor calibrated model. New generates positive aggregate reducing future capital, fostering toward firms. induces consumption-equivalent welfare gain 5% compared competitive equilibrium, can be implemented subsidies on new taxes capital. Institutional subscribers NBER working paper series, residents developing countries may download this without additional charge at www.nber.org.