Capital in the Business Cycle: Renting versus Ownership

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• Gabor Pinter
• Tuesday 14 February 2012, 17:00-18:00
• Lucia Windsor Room, Newnham College.

If you have a question about this talk, please contact Sheryl Anderson.

This paper studies how business cycle dynamics are affected by the possibility to rent as opposed to own productive capital. We provide empirical evidence based on firm-level data for the US which confirms the counter-cyclicality of the share of renting in capital expenditure over the business cycle. We develop a dynamic stochastic general equilibrium model with borrowing constraints and two types of agents, and allow for both owned and rented capital to be used in production. The model focuses on a fundamental trade-off between the two types of capital: only owned capital can serve as collateral, but owning requires more liquidity than renting. The model performs well in replicating the counter-cyclical behavior of the rental share and matching some of the key business cycle moments observed in the data. Finally, simulation results show that the presence of a renting sector alleviates the adverse impacts of a negative financial shock, and these results are confirmed by empirical cross-country evidence.

This talk is part of the Cambridge Finance Workshop Series series.

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