NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inequality

Jan Eeckhout, Boyan Jovanovic

NBER Working Paper No. 6841
Issued in December 1998
NBER Program(s):   PR

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.

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Document Object Identifier (DOI): 10.3386/w6841

Published: Eeckhout, Jan and Boyan Jovanovic. "Knowledge Spillovers And Inequality," American Economic Review, 2002, v92(5,Dec), 1290-1307.

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