Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/193301 
Year of Publication: 
2018
Series/Report no.: 
IZA Discussion Papers No. 12007
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
In this paper, we investigate the effect of real estate prices on productive investment. We build a simple theoretical framework of firms' investment with credit rationing and real estate collateral. We show that real estate prices affect firms' borrowing capacities through two channels. An increase in real estate prices raises the value of the firms' pledgeable assets and mitigates the agency problem characterizing the creditor-entrepreneur relationship. It simultaneously cuts the expected profit due to the increase in the cost of inputs. While the literature only focuses on the first channel, the identification of the second channel allows for heterogeneous effects of real estate prices on investment across firms. We test our theoretical predictions using a large French database. We do find heterogeneous effects of real estate prices on productive investment depending on the position of the firms in the sectoral distributions of real estate holdings. Our preferred estimates indicate that a 10% increase in real estate prices causes a 1% decrease in the investment rate of firms in the lowest decile of the distribution but a 6% increase in the investment rate of firms belonging to the highest decile.
Subjects: 
firms' investment
real estate prices
collateral channel
financial contraints
JEL: 
D22
G30
O52
R30
Document Type: 
Working Paper

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