Search

Intangible assets are a large and growing part of firms’ capital stocks. Intangibles are accumulated via investment—foregoing consumption today for output in the future—but they lack a physical presence. Rather than stopping with this “lack,” we instead focus on the positive properties of intangibles. Specifically, intangibles must be stored, so characteristics of the storage medium have important implications for their value and use. These properties include non-rivalry, allowing the intangible to be used simultaneously in different production streams, and limited excludability, which prevents the firm from capturing all the benefits or rents from the intangible. We develop these ideas in a simple way to illustrate how outcomes such as scalability and distribution of ownership follow. We discuss how intangibles can help to understand important trends in macroeconomics and finance, including productivity, factor shares, inequality, investment and valuation, rents and market power, and firm financing.

In recent years, measured TFP growth in the US has declined. We argue that two forces contributed to this decline: the mismeasurement of intangible capital, and rising markups. Markups affect input shares, while intangibles omitted from measures of investment affect measured capital growth, each potentially generating downward bias in measured TFP growth. Most importantly, when both forces are simultaneously present, their effects reinforce each other and amplify the downward bias in measured TFP growth. Using input-output data, we estimate that this mechanism could account for one-third to two-thirds of the decline in measured TFP growth.

Despite increases in the college earnings premium to persistently high levels, investment in college education remains low. We can understand this apparent puzzle by considering the risk of attending college and, in particular, the possibility of failing to graduate. Students with a reasonable probability of completing college already enroll, and for those who do not enroll, the low chance of completion blunts the impact of the rising college premium. In the absence of improved college readiness, our quantitative results suggest that continuing long-standing trends in skill-biased technological change can be expected primarily to increase earnings inequality rather than college attainment. (JEL E24, I22, I23, J24, J31, O33)

Increasing investment is often recommended as a prescription for increasing productivity, stoking demand, and addressing other causes of low growth or prospective crises in the U.S. economy. Yet an examination of investment suggests that it is not poised to fill this role. Private sector investment has undergone a slow transformation, shifting from structures and equipment investment, with the latter enjoying a long trend of falling prices, to a rising role for intellectual property, software, and other intangible capital. The high depreciation rate associated with this new capital imposes a drag on net investment and hence on capital accumulation. Public investment remains mostly focused on infrastructure but has fallen in half as a share of GDP since its peak in the 1950s. These trends emphasize the potential importance of new types of private capital and their implications for growth, as well as the declining role of public investment, including federal R&D.

Emi Nakamura is the 2019 recipient of the John Bates Clark Medal from the American Economic Association. Emi is an empirical macroeconomist whose work has studied the nature of price-setting and the effects of monetary and fiscal policies, among other issues, and has been notable for using less aggregated data, while addressing central questions about the macroeconomy. We describe Emi's key research contributions, with particular emphasis on those identified by the Honors and Awards Committee of the American Economic Association in her Clark Medal citation, as well as her broader contributions to the field of economics.

The impact of an economic shock depends both on its severity and the resilience of the economic response. Resilience can include the ability to relocate factors, for example, even when new technologies or skills are not yet at the ready. This resilience per se buffers production and has an economic value, which we estimate. The COVID-19 pandemic caused a widespread decline in recorded GDP. Yet, as catastrophic as the collapse was, it was buffered by an unprecedented and spontaneous deployment of what we call “Potential Capital,” the dwelling/residential capital and connective technologies used alongside working from home. Together potential capital and labor working from home provided additional output margins and capacity. We estimate the contribution of this capital, and the remote work that it facilitated, to have roughly halved the decline in GDP in the US reducing the fall in GDP to 9.4 log points in 2020Q2 at the trough of the recession. Similar effects are seen in the 6 OECD countries for which data are available, output fell by 14 log points, but would have fallen by 26 log points had only workplace inputs been available. Accounting for the contribution of “Potential Capital” also revises downwards estimated total productivity gains in the business sector during the pandemic from 8 log points to 5 log points in 2020Q2. We also find an output elasticity of domestic non-dwellings capital to be similar to that of workplace ICT capital, reflecting its role as productive capital. Turning to the future, changes in working from home depend upon relative costs, relative technologies and, crucially, the elasticity of substitution between home and work tasks. We estimate that that elasticity to be more than unity, meaning that the growth of ICT will raise the share of work done remotely.

In recent years, US investment has been lackluster, despite rising valuations. Key explanations include growing rents and growing intangibles. We propose and estimate a framework to quantify their roles. The gap between valuations — reflected in average Q — and investment — reflected in marginal q — can be decomposed into three terms: the value of installed intangibles; rents generated by physical capital; and an interaction term, measuring rents generated by intangibles. The intangible-related terms contribute significantly to the gap, particularly in fast-growing sectors. Our findings suggest care in a pure-rents interpretation, given the rising role of intangibles. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Investment in intangible capital such as R&D has increased dramatically since the 1990s. However, productivity growth remains sluggish in recent years. One potential reason is that a significant share of the increase in intangible investment is geared toward consumer products such as pharmaceutical drugs with limited spillovers to productivity. We document that a significant share of R&D spending in the United States is done by pharmaceutical firms and geared to developing drugs for older patients. Increased life expectancy and quality of life for the elderly increases welfare but may not be reflected in estimates of total factor productivity.

Recent work on macroeconomic trends has emphasized slowing capital investment, but strong business profits and valuations. The retail sector is a microcosm of these trends, and accounts for a large share of the increase in aggregate business concentration also observed in recent years. We show that, in that sector, weak investment and rising concentration are associated with rising productivity. Additionally, stronger productivity is correlated with intangible investment, both over time and across subindustries. Intangible investment may thus provide a joint explanation for rising productivity, weak capital investment, and increasing industry concentration.

Investment in physical capital collapsed during the Great Recession, and while growth subsequently resumed, the capital stock remains below trend (Hall in Quantifying the lasting harm to the US economy from the financial crisis, NBER Macroeconomics Annual, Bureau of Economic Research, 2014). We explore firm-level data on investment and document that investment fell relative to fundamentals at the turn of the millennium—well before the Great Recession. This downturn in investment coincides with a shift in employment toward services and cognitive skills—the “polarization” described by Autor et al. (Am Econ Rev 96(2):189–194, 2006), as a possible consequence of off-shoring and automation. An analogous sorting of firms into industries shows a shift of investment toward spatially “grounded” industries, such as energy and telecommunications, from which capital cannot be relocated. Investment shifts away from production sectors, such as manufacturing, which can be relocated. While high-tech firms grow in number and value, this growth is associated with a flat share of capital investment. For these sectors, we document a shift toward intangible, rather than physical, capital. The “hollowing out” of investment, like labor, carves out manufacturing and production sectors, leaving grounded industries that are less susceptible to off-shoring and cognitively intensive industries that are growing in intangible, rather than fixed, capital.

The Federal Reserve's current monetary policy framework combines conventional policy that sets the level of the federal funds rate with policies that operate through the slope of the term structure, including forward guidance and large-scale asset purchases. These slope policies are particularly important when the federal funds rate is at the zero lower bound. We assess the performance of counterfactual monetary policies since the Great Recession using a structural vector autoregression, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. We find that slope policies played an important role in supporting the recovery, but only partially circumvented the zero lower bound. In our simulations, earlier and more aggressive use of slope policies supports a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent with a 3 percent inflation target coming into the financial crisis recession.

We document that the rise of factors such as software, intellectual property, brand, and innovative business processes, collectively known as “intangible capital” can explain much of the weakness in physical capital investment since 2000. Moreover, intangibles have distinct economic features compared to physical capital. For example, they are scalable (e.g., software) though some also have legal protections (e.g., patents or copyrights). These characteristics may have enabled the rise in industry concentration over the last two decades. Indeed, we show that the rise in intangibles is driven by industry leaders and coincides with increases in their market share and hence, rising industry concentration. Moreover, intangibles are associated with at least two drivers of rising concentration: market power and productivity gains. Productivity gains derived from intangibles are strongest in the Consumer sector, while market power derived from intangibles is strongest in the Healthcare sector. These shifts have important policy implications, since intangible capital is less interest-sensitive and less collateralizable than physical capital, potentially weakening traditional transmission mechanisms. However, these shifts also create opportunities for policy innovation around new market mechanisms for intangible capital.

As the cost of education rises and student debt reaches new highs, more research has focused on financing the acquisition of human capital. Most research has had a positive focus, examining the effect of debt on student choices and outcomes. However, because education financing involves many public policy choices, normative questions have become more prominent. We discuss the trade-offs involved in these choices and propose simple models to help shape these questions. We first develop an overlapping generations framework of student debt to examine the macroeconomic impact of shifting from a parent-funded to a student debt–based financing system. We then consider a framework that includes the supply-side response to different funding regimes; that is, how do enrollment and tuition decisions of schools respond to changes in education financing? We show that shifting from parent-based funding to a student loan program can lower aggregate savings, although welfare still improves if education has a higher return than physical capital investment. A public student loan program also tends to promote enrollment at the cost of higher tuition at for-profit schools and deteriorating loan performance, paid for by taxpayers. Alternative contract designs, with school participation in the lending program, tend to ameliorate these issues.

Consumption, income, and home prices fell simultaneously during the financial crisis, compounding recessionary conditions with liquidity constraints and mortgage distress. We develop a framework to guide government policy in response to crises in cases when government may intervene to support distressed mortgages. Our results emphasize three aspects of efficient mortgage modifications. First, when households are constrained in their borrowing, government resources should support household liquidity up-front. This implies modifying loans to reduce payments during the crisis rather than reducing payments over the life of the mortgage contract, such as via debt reduction. Second, while governments will not find it efficient to directly write down the debt of borrowers, in many cases it will be in the best interest of lenders to do so, because reducing debt is an effective way to reduce strategic default. Moreover, the lenders who bear the credit default risk have a direct incentive to partially write down debt and avoid a full loan loss due to default. Finally, a well-designed mortgage contract should take these considerations into account, reducing payments during recessions and reducing debt when home prices fall. We propose an automatic stabilizer mortgage contract which does both by converting mortgages into lower-rate adjustable-rate mortgages when interest rates fall during a downturn—reducing payments and lowering the present value of borrowers’ debt.

The best predictor of current investment at the firm level is lagged investment. This lagged-investment effect is empirically more important than the cash-flow and Q effects combined. We show that the specification of investment adjustment costs proposed by Christiano et al. (2005) predicts the presence of a lagged-investment effect and that a generalized version of their model is consistent with the behavior of firm-level data from Compustat.

We derive a closed-form solution for Tobin's Q in a stochastic dynamic framework. We show analytically that investment is positively related to Tobin's Q and cash flow, even in the absence of adjustment costs or financing frictions. Both Q and investment move in the same direction as expected revenue growth, so changes in expected revenue growth induce Q and investment to comove positively. Similarly, shocks to current cash flow, arising from shocks to the user cost of capital in our model, cause investment and cash flow per unit of capital to comove positively. Furthermore, we show that this alternative mechanism for the relationship among investment, Q, and cash flow delivers larger cash flow effects for smaller- and faster-growing firms, as observed in the data. Moreover, the empirically small sensitivity of investment to Tobin's Q does not imply implausibly large adjustment costs in our model (since there are no adjustment costs). Calibrating the model generates values of Q similar to those in the data; investment is more sensitive to cash flow than it is to Q, and both responses are of empirically plausible magnitudes. Copyright 2011, Oxford University Press.

Heterogeneity is ubiquitous in firm-level and sectoral data. Equilibrium models, how-ever, typically assume a representative firm, as in Andrew B. Abel and Olivier J. Blanchard (1983). The representative firm paradigm leaves no role for the distribution of capital. We model capital reallocation in a general equilibrium model with two sectors. Capital adjustment costs capture illiquidity in our model, similar to Hirofumi Uzawa’s (1969) capital installation technology. We follow Fumio Hayashi (1982) in assuming that the production technology is linearly homogeneous, which allows us to focus on the sectoral distribution of capital, separately from the level of total capital. The two sectors may have different levels of productivity, and we show that the distribution of capital between the two sectors is the single state variable gov-erning investment, growth, and valuation in the economy.We analytically characterize prices and quan-tities, including investment, growth, the interest rate, and the price of capital (Tobin’s

�Inattentive agents update their information sporadically, and thus respond belatedly to news. We generate optimally inattentive behavior by assuming that to observe the value of his investment portfolio the consumer must pay a cost that is proportional to the portfolio’s contempo raneous value. It is optimal for the consumer to check his investment portfolio at equally spaced points in time, consuming from a riskless trans actions account in the interim. The riskless transactions account that finances consump tion guarantees that funds are never unwittingly exhausted. � We show that the optimal interval of time between consecutive observations of the value of the portfolio is the unique positive solution to a nonlinear equation. Quantitatively, even a small observation cost (one basis point of wealth) implies a substantial (eight-month) decision interval under conventional parameter values.

When investment decisions cannot be reversed and returns to capital are uncertain, the firm faces a higher user cost of capital than if it could reverse its decisions. This higher user cost tends to reduce the firm's capital stock. Opposing this effect is the irreversibility constraint itself: when the constraint binds, the firm would like to sell capital but cannot. This effect tends to increase the firm's capital stock. We show that a firm with irreversible investment may have a higher or a lower expected capital stock, even in the long run, compared to an otherwise identical firm with reversible investment. Furthermore, an increase in uncertainty can either increase or decrease the expected long-run capital stock under irreversibility relative to that under reversibility. However, changes in the expected growth rate of demand, the interest rate, the capital share in output, and the price elasticity of demand all have unambiguous effects.

We characterize a firm's optimal factor adjustment when any number of factors face “kinked” linear adjustment costs so that all factor accumulation is costly to reverse. We first consider a general non-stationary case with a concave operating profit function, unrestricted form of uncertainty and a horizon of arbitrary length. We show that the optimal investment strategy follows a control limit policy at each point in time. The state space of the firm's problem is partitioned into various domains, including a continuation region where no adjustment should optimally be made to factor levels. We then consider two specific model classes and exploit their special structure to derive expressions for their continuation regions.Journal of Economic LiteratureClassification Numbers: D92, E22, E24.

This paper derives closed-form solutions for the investment and value of a competitive firm with a constant-returns-to-scale production function and convex costs of adjustment. Solutions are derived for the case of irreversible investment as well as for reversible investment. Optimal investment is a non-decreasing function of q, the shadow value of capital. Relative to the case of reversible investment, the

While there has been a substantial increase in the return to college (the college premium), college attainment has stagnated. We show that these facts can be reconciled by allowing for uncertainty in college payoffs, in particular around college completion and earnings, with borrowing. With plausible measures of risk and credit availability, even modestly prepared potential enrollees are already inframarginal. Being less-well prepared and poorer, they face a lower expected payoff and more risk. Those more responsive to the college premium already enroll in, and complete, college.

Investment is characterized by costly reversibility when a firm can purchase capital at a given price and sell capital at a lower price. We derive an explicit analytic solution for optimal investment by a firm facing costly reversibility. In addition, we derive a local approximation to the solution which highlights the effects of the parameters of the problem on the triggers for investment. More generally, we extend the Jorgensonian concept of the user cost of capital to the case of uncertainty and define cU and cL as the user costs of capital associated with the purchase and sale of capital, respectively. Optimality requires the" firm to purchase and sell capital as needed to keep the marginal revenue product of capital in" the closed interval [cU,cL]. This prescription encompasses the case of irreversible investment as well as the standard" neoclassical case of costlessly reversible investment. Finally, quantitative analysis suggests" that even when the difference between the purchase and sale prices of capital is small user costs associated with purchasing and selling capital are closer to those applicable under" complete irreversibility than to those applicable under costless reversibility."

Capital investment decisions must recognize the limitations on the firm's ability later to sell off or expand capacity. This paper shows how opportunities for future expansion or contraction can be valued as options, how this valuation relates to the q-theory of investment, and how these options affect the incentive to invest. Generally, the option to expand reduces the incentive to invest, while the option to disinvest raises it. We show how these options interact to determine the effect of uncertainty on investment, how these option values change in response to shifts of the distribution of future profitability, and how the q-theory and option pricing approaches to investment are related.

This paper tests an optimal (S, s) rule in household durable purchases and examines directly the resulting aggregate expenditure dynamics. The observed decision rule responds to income uncertainty and growth as predicted by an (S, s) model resulting from transactions costs. Tests against liquidity constraints find that about half the households purchase according to an optimal (S, s) rule. Aggregating the (S, s) rule over households produces a cross-section distribution of durables holdings. The empirical distribution is similar to that predicted theoretically, as is its response to aggregate shocks. Furthermore, simulations of aggregate expenditure based on the household distribution exhibit dynamics consistent with those observed in the 1980s. Copyright 1994 by University of Chicago Press.

This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of investment. In this extended framework, investment is a non-decreasing function of q, the shadow price of installed capital. There are potentially three investment regimes, which depend on the value of q relative to two critical values. For values of q above the upper critical value, investment is positive and is an increasing function of q, as is standard in the theory branch of the adjustment cost literature. For intermediate values of q, between two critical values, investment is zero. Although this regime features prominently in the irreversibility literature, it is largely ignored in the adjustment cost literature. Finally, if q is below the lower critical value, gross investment is negative, a possibility that is ruled out by assumption in the irreversibility of literature. In general, however, the shadow price q is not directly observable, so we present two examples relating q to observable varieties.

We develop a two sector general equilibrium model with capital accumulation and convex adjustment costs. We use the model to study capital asset pricing and reallocation, as well as optimal consumption and investment decisions. With two sectors, the consumer balances diversification against the potential productivity and efficiency gains of investing more heavily in one sector. The general framework nests and ex-tends standard equilibrium macro-asset pricing models. We show conditions under which aggregates are immune to the distribution of capital and in contrast, when the distribution becomes crucial for both sectoral and aggregate values. Applications of the framework highlight the importance of heterogeneity and capital liquidity - the ability to reallocate capital - for economic growth and asset pricing. Misallocated capital creates risk and reduces utility, but correcting it through capital reallocation reduces efficiency and growth.

Recurrent intervals of inattention to the stock market are optimal if consumers incur a utility cost to observe asset values. When consumers observe the value of their wealth, they decide whether to transfer funds between a transactions account from which consumption must be financed and an investment portfolio of equity and riskless bonds. Transfers of funds are subject to a transactions cost that reduces wealth and consists of two components: one is proportional to the amount of assets transferred, and the other is a fixed resource cost. Because it is costly to transfer funds, the consumer may choose not to transfer any funds on a particular observation date. In general, the optimal adjustment rule---including the size and direction of transfers, and the time of the next observation---is state-dependent. Surprisingly, unless the fixed resource cost of transferring funds is large, the consumer's optimal behavior eventually evolves to a situation with a purely time-dependent rule with a constant interval of time between observations. This interval of time can be substantial even for tiny observation costs. When this situation is attained, the standard consumption Euler equation holds between observation dates if the consumer is sufficiently risk averse.

Do investment models …t …rm-level data? - which model …ts best? To answer this question we estimate alternative models using Compustat data. We …nd that both a version of the Hayashi (1982) and a model with decreasing returns to scale in production …t …rm-level data very well. Our estimates suggest that there is substantial measurement error in Q. This measurement error implies that the investment-cash-‡ow regressions that +� � =

Tobin's Q exceeds one, even without any adjustment costs, for a firm that earns rents as a result of monopoly power or of decreasing returns to scale in production. Even when there are no adjustment costs and marginal Q is always equal to one, Tobin's Q is informative about the firm's growth prospects. We show that investment is positively related to Tobin's Q (which is observable average Q). This effect can be quantitatively small, which has been taken as evidence of very high adjustment costs in the empirical literature, but here is consistent with no adjustment costs at all. In addition, cash flow has a positive effect on investment, and this effect is larger for smaller, faster growing and more volatile firms, even though capital markets are perfect. These results provide a new theoretical foundation for Q theory and also cast doubt on evidence of financing constraints based on cash flow effects on investment

When factors of production can be adjusted costlessly, the mix of factors can be considered separately from their scale. We examine factor choice and utilization when investment is irreversible and subject to a fixed cost, so that the capital stock is a quasi-fixed factor that is adjusted infrequently and by discrete amounts. We derive and analyze analytic approximations for optimal investment behavior, and show how the quasi-fixity of capital eliminates the dichotomy between factor mix and scale. We show that the quasi-fixity of capital can give rise to labor hoarding, even when labor is a purely flexible factor.

We develop a model in which the opportunity for a firm to upgrade its technology to the frontier (at a cost) leads to growth options in the firm's value; that is, a firm's value is the sum of value generated by its current technology plus the value of the option to upgrade. Variation in the technological frontier leads to variation in firm value that is unrelated to current cash flow and investment, though variation in firm value anticipates future upgrades and investment. We simulate this model and show that, consistent with the empirical literature, in situations in which growth options are important, regressions of investment on Tobin's Q and cash flow yield small positive coefficients on Q and larger coefficients on cash flow. We also show that growth options increase the volatility of firm value relative to the volatility of cash flow.

This paper derives closed-form solutions for the investment and market value, under uncertainty, of competitive firms with constant returns to scale production and convex costs of adjustment. Solutions are derived for the case of irreversible investment as well as for reversible investment. Optimal investment is a non-decreasing function of q, the shadow value of capital. The conditions of optimality imply that q cannot contain a bubble; thus, optimal investment depends only on fundamentals. However, the value of the firm may contain a bubble that does not affect investment behavior. Relative to the case of reversible investment, the introduction of irreversibility does not affect q, but it reduces the fundamental market value of the firm.

This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of investment. In this extended framework, investment is a non-decreasing function of q, the shadow price of installed capital. There are potentially three investment regimes, which depend on the value of q relative to two critical values. For values of q above the upper critical value, investment is positive and is an increasing function of q, as is standard in the theory branch of the adjustment cost literature. For intermediate values of q, between two critical values, investment is zero. Although this regime features prominently in the irreversibility literature, it is largely ignored in the adjustment cost literature. Finally, if q is below the lower critical value, gross investment is negative, a possibility that is ruled out by assumption in the irreversibility of literature. In general, however, the shadow price q is not directly observable, so we present two examples relating q to observable varieties.