Leasing as a Mitigation Channel of Capital Misallocation

In this paper, we argue that leasing is an important alternative way of capital reallocation, complementary to directly purchasing capital from the reallocation market, and it significantly mitigates credit-constraint-induced capital misallocation. However, in the existing literature, leased capital is ``unmeasured'' capital in quantifying capital misallocation. Empirically, we show that neglecting leased capital and overlooking its mitigation effect leads to significant overestimations of capital misallocation (Hsieh and Klenow, 2009) and the cyclicality of capital reallocation (Eisfeldt and Rampini, 2006). Theoretically, we develop a general equilibrium model with an explicit buy versus lease decision to demonstrate leasing’s novel role in mitigating capital misallocation