Inequality

38 Pages Posted: 23 Aug 2005 Last revised: 11 Oct 2010

See all articles by Edward L. Glaeser

Edward L. Glaeser

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)

Boyan Jovanovic

New York University - Department of Economics

Multiple version iconThere are 5 versions of this paper

Date Written: December 1998

Abstract

In a growth model, rent-grabbing and free riding can give rise to inequality in productivity and firm size. Inequality among firms affects a firm's incentive to free ride or to grab rents, and, hence, the incentive to invest in research and training We follow Lucas and Prescott (1971) and Hayashi (1982) and assume constant returns in production and in adjustment costs for investment, and perfect capital markets. Our conclusion, however, differs starkly from theirs: Average Tobin's q generally exceeds marginal q. That is, the unit value of capital is lower in big firms, and evidence dating back to Fazzari, Hubbard, and Petersen (1988) supports this claim quite decisively. Such evidence is usually taken to imply that small firms invest at a rate lower than its perfect capital market rate. In our model, however, it arises because small firms rely more on copying than big firms do: The marginal product of capital is equal across firms, but its average product is higher than that because small firms get a disproportionately high external benefit.

Suggested Citation

Glaeser, Edward L. and Jovanovic, Boyan, Inequality (December 1998). NBER Working Paper No. w6841. Available at SSRN: https://ssrn.com/abstract=145113

Edward L. Glaeser (Contact Author)

Harvard University - Department of Economics ( email )

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Boyan Jovanovic

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