The paper presents a theory of leasing in which asset use and

maintenance shape the firm's decision between purchasing or leasing

productive assets. When the asset purchase is financed through a secured debt

contract and the value of the asset is sensitive to the user's uncontractible

maintenance decision, maintenance may be privately unprofitable for the user

and cause asset depletion. This jeopardises the return to the financiers and

erodes the benefit of collateral pledging, particularly relevant for

financially constrained firms. Such a shortcoming can be overcome with a

leasing contract that delegates the maintenance to the lessor. However,

delegation generates a novel agency problem on the lessee, who, by not paying

for maintenance, may practice inefficiently low levels of care and asset abuse

that increase the expected cost of maintenance for the lessor. The paper

characterises circumstances in which it may be optimal to lease rather than

buy, finding that the reliance on leasing may be non-monotone in financing

constraints.