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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.

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.

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.

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.

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."

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 +� � =

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.

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.