Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft

Gavazza, Alessandro (2010): Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft.

Abstract

I construct a dynamic model of transactions in used capital to understand the role of leasing when trading is subject to frictions. Firms trade assets to adjust their productive capacity in response to shocks to profitability. Transaction costs hinder the efficiency of the allocation of capital, and lessors act as trading intermediaries who reduce trading frictions. The model predicts that leased assets trade more frequently and produce more output than owned assets, for two reasons. First, high-volatility firms are more likely to lease than low-volatility firms, since they expect to adjust their capacity more frequently. Second, ownership's larger transaction costs widen owners' inaction bands relative to lessees'. Using data on commercial aircraft, I find that leased aircraft have holding durations 38-percent shorter and fly 6.5-percent more hours than owned aircraft. Additional tests indicate that most of these differential patterns in trading and utilization arise because owners have wider inaction bands than lessees, and carriers' self-selection into leasing plays a minor role.

• Item Type: MPRA Paper
• Language: English
• Keywords: Leasing, Capital Goods, Aircraft
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; L - Industrial Organization > L6 - Industry Studies: Manufacturing > L62 - Automobiles ; Other Transportation Equipment ; Related Parts and Equipment; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity

References

Gavazza, A. "Asset Liquidity and Financial Contracts: Evidence from Aircraft Leases," Journal of Financial Economics, Vol. 95, Issue 1 (Jan., 2010), pp. 62-84.

Gavazza, A. "The Role of Trading Frictions in Real Asset Markets," American Economic Review, forthcoming.