Facilitating Entry through Leasing

Abstract

We study how leasing plays a novel role in improving total factor productivity (TFP) by facilitating entry and technology adoption. As a form of more collateralizable financing, leasing provides additional financing for investment required in a productive sector, and raises the expected payoff of entering this sector. We analytically characterize this extensive-margin role of leasing in terms of efficiency gains. Through a dynamic general equilibrium model with sectoral choices, collateral constraints, and buy versus lease decisions, we quantitatively show that about 5% of TFP gains can be achieved from leasing along this channel.

Keywords: Leased capital; Collateral constraint; Total factor productivity (TFP); Extensive margin; Entry; Technology adoption; Capital misallocation

JEL Classification: E22, E32, E44, G32