Has van Vlokhoven, Stockholm University
“Estimating the Cost of Capital and the Profit Share”
Compensation of the factor of production capital is not directly observed since most firms own part of their capital stock. In this paper, I develop a new method to estimate capital compensation. I show how firms' input choices reveal the user cost of capital when firms minimize costs and produce according to a homogeneous production function. Subtracting estimated capital compensation together with all other observed costs from sales gives economic profits. Estimating the model using Compustat data, I find that the cost of capital has been declining, and that the profit share has been increasing over the past fifty years from around 4% of sales to around 8% of sales. The increase in the profit share coincides with the observed fall in the labor share, while I estimate the capital share to be falling as well. Therefore, the fall in the labor share is not due to an increased capital intensity, but due to an increase in profits. Furthermore, I find that the increase in profits is due to reallocation between firms, but not due to reallocation between industries. I also document that profits have become more back-loaded over the life cycle of the firm, which provides a potential explanation for the fall in firm entry. Finally, I find an upward trend in the returns to scale, which combined with the rise in profits implies that markups have been increasing.
Contact person: Emiliano Santoro