Reallocating and Pricing Illiquid Capital: Two Productive Trees

ABSTRACT We develop a two‐sector general‐equilibrium model with capital accumulation and convex adjustment costs to analyze sectoral capital reallocation and asset pricing. Consumers weigh the diversification benefits of spreading investment across sectors against the productivity gains of concentrating capital in the more productive sector. We derive conditions under which sectoral capital reallocation shapes both sectoral and aggregate outcomes. Our framework highlights the importance of heterogeneity and capital liquidity—the ease of reallocating capital—in driving growth and asset prices, and uncovers a fundamental trade‐off: while diversification enhances risk sharing, reallocation may dampen aggregate growth.