Delayed Capital Reallocation

How do firms adjust their balance sheets and reallocate capital stock in response to recurrent productivity or profitability shocks? Why does capital reallocation fluctuate procyclically, while the potential benefits to reallocate appear to be countercyclical? To answer these questions, this paper develops a tractable dynamic general equilibrium model. In the model, firms face idiosyncratic productivity shocks while at the same time are restricted by the illiquidity of capital stock and financing constraints. The model shows that asset illiquidity and financing constraints interact and generate capital reallocation delays. These delays result in cross-sectional productivity dispersion and losses of total factor productivity (TFP), which become more severe during recessions. ∗I am indebted to Nobu Kiyotaki, Markus Brunnermeier, and Ben Moll. Special thanks go to Tom Sargent for encouragement and support. I am also very grateful for the insightful discussions with Mark Aguiar, Marco Bassetto, Jonas Fisher, Mike Golosov, Francois Gourio, Ji Huang, Jakub Jurek, Richard Rogerson, Esteban RossiHansberg, Hyun Shin, Chris Sims, Gabriel Tenorio, and Mark Wright, as well as seminar participants at the 2012 SED Annual Conference, Princeton University, Humboldt University, Chicago Fed, New York Fed, Duke University (Fuqua), St. Louis Fed, University of Michigan (Ross), UCLA Anderson, University of Iowa, UCL, LSE IHS Vienna, EIEF, University of Maryland (Smith), Kansas City Fed, HKU, HKUST for helpful comments. All remaining errors are my own. Address: Department of Economics, University College London, 30 Gordon Street, London, WC1H 0AX, UK. Email: [email protected].