Leasing as a Mitigation of Financial Accelerator Effects

We document that leased capital accounts for about 20% of total physical productive assets used by US public firms, and its proportion is more than 40% among small and financially constrained firms. The leased capital ratio exhibits a strong countercyclical pattern over business cycles and a positive correlation with cross-sectional idiosyncratic uncertainty. We argue that existing macro models with financial frictions assume that firms cannot rent capital and overlook the effects of leasing activities on business cycle dynamics. We explicitly introduce a buy-versus-lease decision into the Bernanke-Gertler-Gilchrist financial accelerator model setting to demonstrate a novel and quantitatively important economic mechanism: that the increased use of leased capital when financial constraints become tighter in bad states significantly mitigates the financial accelerator mechanism and thus also mitigates the response of macroeconomic variables to negative total factor productivity shocks and risk shocks. We provide strong empirical evidence to support our mechanism.