Capital Share Dynamics When Firms Insure Workers
59 Pages Posted: 9 Jul 2016 Last revised: 15 Oct 2017
Date Written: October 1, 2017
Although the aggregate capital share for U.S. firms has increased, the firm-level capital share has decreased on average. The divergence is due to the largest firms. While these mega-firms now produce a larger output share, their labor compensation has not increased proportionately. We develop a model in which firms insure workers against firm-specific shocks. More productive firms allocate more rents to shareholders, while less productive firms endogenously exit. Increasing firm-level risk delays the exit of less productive firms and increases the measure of mega-firms, raising the aggregate capital share and lowering it on average. We present evidence supporting this mechanism.
Keywords: Idiosyncratic Risk, Selection, Capital Share, Labor Share, National Income Accounting, Selection
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