Working Paper Series no. 1058. This paper examines how heterogeneous capital pledgeability shapes capital allocation. I first document, using French firm-level data, that firms holding more pledgeable capital are structurally more leveraged and display greater sensitivity of investment to credit supply shocks. I then incorporate heterogeneous capital pledgeability into a general equilibrium model with collateral constraints. This feature creates sectoral capital misallocation: high-pledgeability capital is less costly to accumulate and thus yields lower expected returns than low-pledgeability capital, both in steady state and in response to credit supply shocks. I estimate the model based on a simple distinction between commercial real estate and other types of capital goods, the former being more pledgeable. I then show that capital misallocation is substantial over the credit cycle. Because these capital goods are imperfect substitutes and firms face a unique interest rate, redistributive credit policies taxing debt issued by high-pledgeability firms while subsidizing that of less pledgeable firms raise welfare, particularly when implemented during a credit expansion.
Mortgage ratio of French non-financial firms (2019-2024)
Non-Technical Summary
The role of financial frictions in shaping investment dynamics has been a long-standing question in economics. This paper contributes to this strand of research by highlighting that capital goods differ in their pledgeability. In the event of default, some of these goods, such as office buildings, can be readily redeployed by other firms, thereby preserving their resale value and making them effective collateral in credit contracts. By contrast, firm-specific capital, such as machines or patents, suffer large liquidation discounts and are therefore less widely used as collateral. Figure 1 illustrates this heterogeneity by plotting the mortgage ratio — the share of bank credit explicitly collateralized — of French non-financial firms. Commercial Real Estate (CRE) investors, i.e. firms specializing in supplying real estate to other firms, stand out as owning particularly pledgeable capital: their median mortgage ratio exceeds 50%, far above that of most other non-financial sectors. Within other sectors, such as energy or transport, a sizeable share of firms reaches comparable mortgage ratios. This paper exploits this variation to study how differences in pledgeability shape capital accumulation and its allocation across firms.
Leveraging the French firm-level data underpinning the figure above, I document that firms holding more pledgeable assets are structurally more leveraged and display greater sensitivity of investment to credit supply shocks. I then develop a macroeconomic model in which firms can borrow against different types of capital that vary in their pledgeability. I show that this feature generates persistent differences in expected returns across capital types. As these capital types cannot be easily substituted, these differences lead to an inefficient capital allocation. I estimate the model based on a simple distinction between CRE and other types of capital goods, the former being more pledgeable. I then show that misallocation is sizable: credit policies that redirect borrowing capacity from firms with more pledgeable assets (such as CRE) toward other firms can improve welfare. Although these policies decrease the overall level of capital, they improve its allocation. This is particularly beneficial in the expansion phase of a credit cycle but less so in a contraction phase.
These findings have two important policy implications. First, they underline the importance of sectoral misallocation, while the literature has been mostly focused on misallocation across individual firms. Although both phenomena can coexist and be equally important, policy implications are more straightforward for the former, as targeted firms are more easily identifiable by the pledgeability of their assets. Second, these findings highlight that designing credit policies requires considering heterogeneity in capital pledgeability, so as not to reinforce structural credit misallocation. This includes unconventional monetary policy aimed at boosting credit supply when policy rates are at their lower bound, as well as macroprudential and fiscal policies affecting borrowing costs.
Keywords: Capital Pledgeability, Capital Misallocation, Credit Policies
Codes JEL: E44, E58, E61
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Updated on the 7th of August 2026