Capital allocations in closed and open economies

Thesis

This thesis consists of three self-contained essays on the allocation of capital, applied in the context of closed and open economies. Chapter 1 explores whether the rising share of intangible capital leave firms with less loan collateral, hence tightening firm borrowing constraints. Using a large sample of UK firms, the structural parameters governing the pledgeability of intangible and tangible capital are estimated. The results suggest that the collateral value of intangibles is significantly lower than the collateral value of tangible assets, consistent with the view that it is harder to borrow against intangible capital. Building on these results, Chapter 2 investigates the impact of the low collateral value of intangibles on aggregate productivity and resource allocation. I construct a model with heterogeneous firms facing financial constraints and using tangible and intangible capital in production. In addition to reducing investment and employment, the low collateral value of intangibles amplifies opposing mechanisms that have previously been overlooked. On the one hand, the financing friction reduces productivity by limiting default and exit of less productive firms. On the other hand, the presence of intangibles leads to a tighter connection between firm financing costs and productivity. Quantitatively, the former effect dominates and financial constraints have a negative impact on the economy – much larger than when intangibles are ignored. Finally, Chapter 3 explores the allocation of capital in an open economy context. I examine the ability of frictionless open economy models to generate empirically consistent patterns in gross capital flows. Through the lens of a simple two-country model, I find that standard shocks change hedging properties of assets, resulting in positively correlated capital flows and the puzzling “retrenchment" of domestic capital following adverse domestic shocks.

Authors: Holttinen, STK

• DOI: 10.5287/ora-e9eqxnk74
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: intangible capital; gross capital flows; borrowing constraint; misallocation; retrenchment; international capital flows; productivity; procyclical capital flows; dynamic portfolio choice; financial frictions; endogenous default
• Subjects: Macroeconomics