Capital Share Dynamics When Firms Insure Workers
Journal of Finance, Forthcoming
Stanford University Graduate School of Business Research Paper No. 16-35
70 Pages Posted: 9 Jul 2016 Last revised: 17 Dec 2018
There are 2 versions of this paper
Capital Share Dynamics When Firms Insure Workers
Capital Share Dynamics When Firms Insure Workers
Date Written: October 1, 2017
Abstract
Although the aggregate capital share of U.S. firms has increased, the firm-level capital share of a typical U.S. firm has decreased. This divergence is due to mega-firms that now produce a larger output share without a proportionate increase in labor compensation. We develop a model in which firms insure workers against firm-specific shocks, where more productive firms allocate more rents to shareholders, while less productive firms endogenously exit. Increasing firm-level risk delays exit and increases the measure of mega-firms, which raises the aggregate capital share while lowering the average firm's capital share. An increase in the level of rents quantitatively magnifies this effect. We present evidence supporting this mechanism.
Keywords: Idiosyncratic Risk, Selection, Capital Share, Labor Share, National Income Accounting, Selection
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