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.