On the Cost of Capital, Profits and the Diffusion of Ideas

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. 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% 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. Profits and the Marginal Product of Capital Around the World The extent to which marginal products of capital are equalized across countries is informative of how well international capital markets function. I estimate the marginal product of capital across a wide range of countries while allowing for imperfect competition. I find that richer countries have a higher marginal product of capital than poorer countries, but that this is entirely driven by differences in depreciation rates. Thus, in terms of output net of depreciation there is no gain by reallocating capital from poor to rich countries or vice versa. Furthermore, I find that profits have increased globally, but that the rise in profits is more pronounced in rich countries. The Life Cycle of Profits Old firms make more profits than young firms, and nowadays profits are more back-loaded than thirty years ago. I study to what extent this changing life-cycle pattern of profits explains the observed rise in profits and fall in firm entry. I build a quantitati