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The Intangible Divide: Why Do So Few Firms Invest in Innovation?
February 2025
Working Paper Number:
CES-25-15
Investments in software, R&D, and advertising have surged, nearing half of U.S. private nonresidential investment. Yet just a few hundred firms dominate this growth. Most firms, including large ones, regularly invest little in capitalized software and R&D, widening this 'intangible divide' despite falling intangible prices. Using comprehensive US Census microdata, we document these patterns and explore factors associated with intangible investment. We find that firms invest significantly less in innovation-related intangibles when their rivals invest more. One firm's investment can obsolesce rivals' investments, reducing returns. This negative pecuniary externality worsens the intangible divide, potentially leading to significant misallocation.
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Good Dispersion, Bad Dispersion
March 2024
Working Paper Number:
CES-24-13
We document that most dispersion in marginal revenue products of inputs occurs across plants within firms rather than between firms. This is commonly thought to reflect misallocation: dispersion is 'bad.' However, we show that eliminating frictions hampering internal capital markets in a multi-plant firm model may in fact increase productivity dispersion and raise output: dispersion can be 'good.' This arises as firms optimally stagger investment activity across their plants over time to avoid raising costly external finance, instead relying on reallocating internal funds. The staggering in turn generates dispersion in marginal revenue products. We use U.S. Census data on multi-plant manufacturing firms to provide empirical evidence for the model mechanism and show a quantitatively important role for good dispersion. Since there is less scope for good dispersion in emerging economies, the difference in the degree of misallocation between emerging and developed economies looks more pronounced than previously thought.
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Grouped Variation in Factor Shares: An Application to Misallocation
August 2022
Working Paper Number:
CES-22-33
A striking feature of micro-level plant data is the presence of significant variation in factor cost shares across plants within an industry. We develop a methodology to decompose cost shares into idiosyncratic and group-specific components. In particular, we carry out a cluster analysis to recover the number and membership of groups using breaks in the dispersion of factor cost shares across plants. We apply our methodology to Chilean plant-level data and find that group-specific variation accounts for approximately one-third of the variation in factor shares across firms. We also study the implications ofthese groups in cost shares on the gains from eliminating misallocation. We place bounds on their importance and find that ignoring them can overstate the gains from eliminating misallocation by up to one-third.
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Capital Investment and Labor Demand
February 2022
Working Paper Number:
CES-22-04
We study how bonus depreciation, a policy designed to lower the cost of capital, impacted investment and labor demand in the US manufacturing sector. Difference-in-differences estimates using restricted-use US Census Data on manufacturing establishments show that this policy increased both investment and employment, but did not lead to wage or productivity gains. Using a structural model, we show that the primary effect of the policy was to increase the use of all inputs by lowering overall costs of production. The policy further stimulated production employment due to the complementarity of production labor and capital. Supporting this conclusion, we nd that investment is greater in plants with lower labor costs. Our results show that recent policies that incentivize capital investment do not lead manufacturing plants to replace workers with machines.
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Housing Booms and the U.S. Productivity Puzzle
January 2020
Working Paper Number:
CES-20-04
The United States has been experiencing a slowdown in productivity growth for more than a decade. I exploit geographic variation across U.S. Metropolitan Statistical Areas (MSAs) to investigate the link between the 2006-2012 decline in house prices (the housing bust) and the productivity slowdown. Instrumental variable estimates support a causal relationship between the housing bust and the productivity slowdown. The results imply that one standard deviation decline in house prices translates into an increment of the productivity gap -- i.e. how much an MSA would have to grow to catch up with the trend -- by 6.9p.p., where the average gap is 14.51%. Using a newly-constructed capital expenditures measure at the MSA level, I find that the long investment slump that came out of the Great Recession explains an important part of this effect. Next, I document that the housing bust led to the investment slump and, ultimately, the productivity slowdown, mostly through the collapse in consumption expenditures that followed the bust. Lastly, I construct a quantitative general equilibrium model that rationalizes these empirical findings, and find that the housing bust is behind roughly 50 percent of the productivity slowdown.
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Creditor Rights, Technology Adoption, and
Productivity: Plant-Level Evidence
April 2018
Working Paper Number:
CES-18-20
I analyze the impact of stronger creditor rights on productivity using plant-level data from the U.S. Census Bureau. Following the adoption of anti-recharacterization laws that give lenders greater access to the collateral of firms in financial distress, total factor productivity of treated plants increases by 2.6 percent. This effect is mainly observed among plants belonging to financially constrained firms. Furthermore, treated plants invest in capital of younger vintage and newer technology, and become more capital-intensive. My results suggest that stronger creditor rights relax borrowing constraints and help firms adopt more efficient production technologies.
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Small and Large Firms Over the Business Cycle
February 2018
Working Paper Number:
CES-18-09
Drawing on a new, con dential Census Bureau dataset of financial statements of a representative sample of 80000 manufacturing firms from 1977 to 2014, we provide new evidence on the link between size, cyclicality, and financial frictions. First, we only find evidence of lower cyclicality among the very largest firms (the top 1% by size). Second, due to high and rising concentration of sales and investment, the lower sensitivity of the top 1% firms dominates the behavior of aggregate fluctuations. Third, we show that this differential sensitivity does not appear to be driven by financial frictions. The higher sensitivity of the bottom 99% does not disappear after controlling for measures of financial strength, is not statistically significant after
identified monetary policy shocks, and does not appear in debt financing flows. Evidence from 3-digit industries suggests a non-financial explanation: the largest 1% of firms are less sensitive due to a more diversified customer base.
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Macro and Micro Dynamics of Productivity: From Devilish Details to Insights
January 2017
Working Paper Number:
CES-17-41R
Researchers use a variety of methods to estimate total factor productivity (TFP) at the firm level and, while these may seem broadly equivalent, how the resulting measures relate to the TFP concept in theoretical models depends on the assumptions about the environment in which firms operate. Interpreting these measures and drawing insights based upon their characteristics thus must take into account these conceptual differences. Absent data on prices and quantities, most methods yield 'revenue productivity' measures. We focus on two broad classes of revenue productivity measures in our examination of the relationship between measured and conceptual TFP (TFPQ). The first measure has been increasingly used as a measure of idiosyncratic distortions and to assess the degree of misallocation. The second measure is, under standard assumptions, a function of funda-
mentals (e.g., TFPQ). Using plant-level U.S. manufacturing data, we find these alternative
measures are (i) highly correlated; (ii) exhibit similar dispersion; and (iii) have similar relationships with growth and survival. These findings raise questions about interpreting the first measure as a measure of idiosyncratic distortions. We also explore the sensitivity of estimates of the contribution of reallocation to aggregate productivity growth to these alternative approaches. We use recently developed structural decompositions of aggregate productivity growth that depend critically on estimates of output versus revenue elasticities. We find alternative approaches all yield a significant contribution of reallocation to
productivity growth (although the quantitative contribution varies across approaches).
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An Empirical Analysis of Capacity Costs
January 2017
Working Paper Number:
CES-17-26
A central premise of management accounting is that including the cost of unused capacity in product costs can distort these costs and misguide users. Yet, there is little large-scale empirical evidence on the materiality of the cost of unused capacity. This study uses a confidential Census sample of 151,900 U.S. manufacturing plants from 1974-2011 to investigate the impact of separating the cost of unused capacity. We find that excluding the cost of unused capacity increases operating profit margins by approximately 26 percent. This order of magnitude is economically significant, and is pervasive across industries and over time. In additional analyses, we find that separating the cost of unused capacity largely smooths the time-series variation in unitized product costs and profit margins. Our finding of higher mean and lower variation of adjusted margins should be of considerable interest to both investors and managers.
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State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data
January 2017
Working Paper Number:
CES-17-02
Using Census microdata on multi-state firms, we estimate the impact of state taxes on business activity. For C corporations, employment and the number of establishments have corporate tax elasticities of -0.4, and do not vary with changes in personal tax rates. Pass-through entity activities show tax elasticities of -0.2 to -0.3 with respect to personal tax rates, and are invariant with respect to corporate tax rates. Reallocation of productive resources to other states drives around half the effect. Capital shows similar patterns but is 36% less elastic than labor. The responses are strongest for firms in tradable and footloose industries.
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