Renting for Development

We study the role of rental markets in the development context. We argue that renting is a form of collateralized financing that allows financially constrained households to deploy more assets. We provide a dynamic model in which households can rent or buy the capital assets required for production. Households can borrow against assets they own and the cost of collateralizing loans is increasing in leverage. Renting allows higher leverage due to a repossession advantage as the financier retains ownership. The model predicts that more financially constrained households choose higher leverage and rent more capital assets. Using unique panel data on households in a developing economy, we show that renting is a quantitatively important mode of financing. Households with low net worth rent more and borrow more both in the cross section and within household over time, consistent with our theory. These cross-sectional patterns in rentals obtain for equipment and land & structures. In terms of levels, households with low net worth rent most of the equipment they deploy; in contrast, the level of renting of land and structures seems low relative to developed economies. In our view, rental market development deserves attention similar to the one received by financial market development.