On the Cost of Capital, Profits and the Diffusion of Ideas
Abstract: Estimating the Cost of Capital and the Profit Share Compensation of the factor of production capital is not directly observed since most firms own part of their capital stock. I develop a new method to estimate capital compensation. I show how firms' input choices reveal the user cost of capital when firms minimize costs and produce according to a homogeneous production function. Subtracting estimated capital compensation together with all other observed costs from sales gives economic profits. Estimating the model using Compustat data, I find that the cost of capital has been declining, and that the profit share has been increasing over the past fifty years from around 4% to around 8% of sales. The increase in the profit share coincides with the observed fall in the labor share, while I estimate the capital share to be falling as well. Therefore, the fall in the labor share is not due to an increased capital intensity, but due to an increase in profits.Profits and the Marginal Product of Capital Around the World The extent to which marginal products of capital are equalized across countries is informative of how well international capital markets function. I estimate the marginal product of capital across a wide range of countries while allowing for imperfect competition. I find that richer countries have a higher marginal product of capital than poorer countries, but that this is entirely driven by differences in depreciation rates. Thus, in terms of output net of depreciation there is no gain by reallocating capital from poor to rich countries or vice versa. Furthermore, I find that profits have increased globally, but that the rise in profits is more pronounced in rich countries.The Life Cycle of Profits Old firms make more profits than young firms, and nowadays profits are more back-loaded than thirty years ago. I study to what extent this changing life-cycle pattern of profits explains the observed rise in profits and fall in firm entry. I build a quantitative life cycle model with oligopolistic competition and an occupational choice between being an entrepreneur and being a worker. All else equal, the more back-loaded profits are, the lower the value of the firm due to discounting, and therefore the fewer agents choose to be an entrepreneur. In equilibrium, aggregate profits rise to a level such that agents are indifferent between occupations. I find that the observed change in the life-cycle pattern of profits explains about two-thirds of the rise in profits, and more than fully explains the fall in firm entry.Diffusion of Ideas in Networks and Endogenous Search I study the diffusion of technology when the decision to search for productivity-enhancing technologies depends on the network of interactions between agents. Agents have the option to engage in costly learning from their first-degree connections. The more productive an agent's connections, the more willing it is to learn. Hence, the network affects the reservation productivity at which agents choose to learn and affects therefore aggregate productivity. I find that the denser the network, the higher learning effort and therefore the higher total factor productivity and the lower inequality. However, the effect of the network on the share of agents that learn in equilibrium is ambiguous. Furthermore, I find that nodes that are central in terms of their closeness to other nodes tend to exert more learning effort and have a higher productivity.
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