Reallocating and Pricing Illiquid Capital: Two Productive Trees

Janice C Eberly, Neng Wang

Research output: Working paper

Abstract

We develop a tractable two-sector equilibrium model with capital accumulation and adjustment costs. We study capital reallocation decisions and asset pricing. With two sectors, the consumer balances diversification benefits against reallocation costs and efficiency losses in production. The distribution of capital between the two sectors determines the risk-free rate, risk premium, investment, and Tobin’s q at both sectoral and aggregate levels. Our framework highlights the importance of sectoral heterogeneity and capital liquidity for economic growth and asset pricing. An unbalanced distribution of capital increases risk and reduces welfare, but making sectors more balanced through capital reallocation reduces efficiency and growth.
Original languageEnglish (US)
Number of pages47
StatePublished - May 31 2011

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