Capital Share Dynamics When Firms Insure Workers

Barney Hartman-Glaser, Hanno Lustig, Mindy X. Zhang

NBER Working Paper No. 22651
Issued in September 2016, Revised in October 2017
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth

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.

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Document Object Identifier (DOI): 10.3386/w22651

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