This paper shows that the amount of capital reallocation between firms is procyclical. In contrast, the benefits to capital reallocation appear countercyclical. We measure the amount of reallocation using data on flows of capital across firms and the benefits to capital reallocation using several measures of the cross sectional dispersion of the productivity of capital. We then study a calibrated model economy where capital reallocation is costly and impute the cost of reallocation. We find that the cost of reallocation needs to be substantially countercyclical to be consistent with the observed joint cyclical properties of reallocation and productivity dispersion. JEL Classification: E22; E32; E44; G34

This paper constructs, for the five largest cities in the United States, user costs and rents for the same structure, in levels (i.e., measured in dollars). The levels formulation is a major advantage over indexes since one can answer questions like “Is it cheaper to rent or to own? ” or “Are houses overvalued? ” because such questions are essentially about the levels of rents and house prices and their fundamentals. These new measures are constructed using Consumer Expenditure Survey (CE) Interview data from 1982 to 2002, along with house price appreciation forecasts from Verbrugge (2007a). Characteristics, current market value, and rental equivalence of owneroccupied housing are used in a regression framework to predict the rent associated with a structure with median characteristics in each city. The property value of this median house is used to construct a user cost estimate for this structure. We find that, for the median structure in each city, estimated user costs and rents diverge to a surprising degree, in keeping with the previously noted findings of Verbrugge (2007a). It is not always cheaper to own: user costs sometimes lie well above rents. Finally, the dynamics of the estimated price-to-rent ratio are generally similar to those found in conventional estimates based upon indexes, suggesting that

This paper presents an analytically tractable continuous-time general equilibrium model with investment irreversibility and fixed adjustment costs. In the model, there is a continuum of firms that are subject to idiosyncratic shocks to capital. Although the presence of investment frictions lowers consumer welfare, it may raise or reduce the long-run average capital stock, depending on the degree of idiosyncratic uncertainty. An increase in this uncertainty may raise equilibrium aggregate capital, but reduce welfare. An unexpected permanent change in the corporate income tax rate affects the investment trigger and target values, and hence the size and rate of capital adjustment. Following this tax policy, the percentage changes in equilibrium quantities are larger when fixed adjustment costs are larger. These changes are significantly smaller in a general equilibrium model than in a partial equilibrium model.

Every year 400,000 entrepreneurs fail and 20 % of them file for bankruptcy. Thus the personal bankruptcy law has important implications for entrepreneurship. The option to declare bankruptcy encourages entrepreneurship through providing insurance since entrepreneurs may default in bad times. However, perfectly competitive financial intermediaries take the possibility of default into account and they charge higher interest rates which reflect these default probabilities. Thus personal bankruptcy provides insurance at the cost of worsening credit conditions. We develop a quantitative general equilibrium model of occupational choice that examines the effects of the US personal bankruptcy law on entrepreneurship. The model explicitly incorporates the US legislative framework and replicates empirical features of the US economy regarding entrepreneurship, wealth distribution and bankruptcy filings by entrepreneurs. Our quantitative evaluation shows that the current US bankruptcy law is too lenient. It provides too much insurance at the expense of worsened credit conditions. According to our simulations, halving the wealth exemption level from the current one would increase entrepreneurship, the median firm size, welfare and social mobility without increasing inequality. However, eliminating the possibility of bankruptcy completely would reduce welfare and entrepreneurship. We thank Alex Michaelides for his continuous support and valuable comments, and Francesco Caselli and Maitreesh Ghatak for helpful comments at various stages of this research. We are also

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We model merger waves as reallocation waves, and argue that mergers spread new technology in a way that is similar to that of entry and exit of firms. We focus on two periods: 1890-1930 during which electricity and the internal combustion engine spread through the U.S. economy, and 1970-2000 — the Information Age. The model’s main implication — that exits should lead mergers — is supported by data from both epochs. 1

This paper proves the optimality of an (S, s) policy in a discrete-time model of investment with fixed adjustment costs and complete irreversibility. Investment is shown to depend simultaneously on marginal and average Q, which are sufficient statistics of, respectively, marginal and total gains of adjustment. Cash-flows are not a correct proxy for the marginal value of capital, the latter being a non-monotonic function of profitability. Neither functional forms nor calibration are imposed and there is no need for numerical procedures. The result holds for a wide class of shocks and technologies. Proofs use the concept of K-convexity introduced by [Scarf, 1960].

This paper studies optimal divestment policy of an investor in a …rm that may partially and gradually divest its capital or sell the whole …rm at once. Partial divestment o¤ers greater ‡exibility while a whole-…rm transaction provides a price premium. We show that, if the price premium includes both a …xed and a proportional component, a large …rm optimally starts to divest partial capital before choosing to sell the whole-…rm. Full-…rm divestment is preferable over partial divestment with higher pro…t volatility, in more declining markets and if capital is less industry-speci…c. 1

We develop a dynamic general equilibrium model to study the impact of the 2003 dividend and capital gains tax cuts. Firms are heterogeneous in productivity and make investment and financing decisions subject to capital adjustment costs, equity issuance costs, and collateral constraints. Our calibrated model predicts that when the tax cuts are unexpected and temporary, dividend payments rise immediately by about 35 percent (relative to the level in the initial steady state). In the expiration date of the tax cuts, dividend payments decrease by about 15 percent. Aggregate investment decreases in the periods when the tax cuts are implemented, leading to an 11 percent drop in the period immediately prior to the expiration date of the tax cuts.

assistance. Greenstone acknowledges generous funding from the American Bar Foundation. Moretti thanks the UCLA Senate for a generous grant. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research