Financing Durable Assets

This paper studies the financing of durable assets in a model with collateral constraints due to limited enforcement. Durability affects the ease of financing: we show that more durable assets require larger down payments of internal funds per unit of capital making them harder to finance, because durability raises the price of an asset and hence the overall financing need more than its collateral value. Thus, financial constraints have a bigger impact on purchases of more durable capital, such as land, structures, and durable equipment. This basic insight has implications for the choice between new and used capital, technology adoption, and the rent versus buy decision. Since new assets are more durable than used ones, unconstrained borrowers buy new assets and sell them when they are used, while constrained borrowers purchase used assets. Financial constraints inhibit technology adoption as constrained borrowers may adopt less durable, low quality assets, that are otherwise dominated technologies. More durable assets are more likely to be rented given their larger financing need. Legal enforcement affects trade in durable assets and technology adoption; weak legal enforcement economies are net importers of used assets and invest a larger fraction in less durable, low quality assets.