TY  - JOUR
AU  - Eeckhout,Jan
AU  - Jovanovic,Boyan
TI  - Inequality
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6841
PY  - 1998
Y2  - December 1998
UR  - http://www.nber.org/papers/w6841
L1  - http://www.nber.org/papers/w6841.pdf
N1  - Author contact info:
Jan Eeckhout
Department of Economics
University College London
30 Gordon Street
London WC1H 0AX
E-Mail: eeckhout@ssc.upenn.edu

Boyan Jovanovic
New York University
Department of Economics
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 212/998-8953
Fax: 212/995-4186
E-Mail: Boyan.Jovanovic@nyu.edu
AB  - 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.
ER  -