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Capital Share Dynamics When Firms Insure Workers

Barney Hartman-Glaser, Hanno Lustig, Mindy Z. Xiaolan

NBER Working Paper No. 22651
Issued in September 2016, Revised in August 2018
NBER Program(s):The Asset Pricing Program, The Corporate Finance Program, The Economic Fluctuations and Growth Program

Although the aggregate capital share of U.S. firms has increased, the firm-level capital share of a typical U.S. firm has decreased. This divergence is due to mega-firms that now produce a larger output share without a proportionate increase in labor compensation. We develop a model in which firms insure workers against firm-specific shocks, where more productive firms allocate more rents to shareholders, while less productive firms endogenously exit. Increasing firm-level risk delays exit and increases the measure of mega-firms, which raises the aggregate capital share while lowering the average firm's capital share. An increase in the level of rents quantitatively magnifies this effect. We present evidence supporting this mechanism.

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Document Object Identifier (DOI): 10.3386/w22651

Published: BARNEY HARTMANā€GLASER & HANNO LUSTIG & MINDY Z. XIAOLAN, 2019. "Capital Share Dynamics When Firms Insure Workers," The Journal of Finance, vol 74(4), pages 1707-1751.

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