Frictional Capital Reallocation I: Ex Ante Heterogeneity
Wright, R; Xiao, SX; Zhu, Y
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We study dynamic general equilibrium models where capital is traded in frictional markets featuring liquidity considerations. Gains from trade arise from ex ante heterogeneity: some firms are better at investment, so they build capital in the primary market, while others acquire it in the secondary market. We consider specifications with random search and bargaining, as well as those with directed search and posting, and provide strong results for both on existence, uniqueness, efficiency and comparative statics. Monetary and fiscal policy are discussed in detail. Among other advantages, the framework is tractable enough to analyze using simple diagrams.