Showing papers on "Physical capital published in 1996"

Financial Capital, Human Capital, and the Transition to Self-Employment:Evidence from Intergenerational Links

Abstract: The environment for business creation is central to economic policy, as entrepreneurs are believed to be forces of innovation, employment and economic dynamism. We use data from the National Longitudinal Surveys (NLS) to investigate the relative importance of financial and human capital exploiting the variation provided by intergenerational links. Specifically, we estimate the impacts of parental wealth and human capital on the probability that an individual will make the transition from a wage and salary job to self-employment. We find that young men's own financial assets exert a statistically significant, but quantitatively modest effect on the transition to self-employment. In contrast, the capital of parents exerts a large influence. Parents' strongest effect runs not through financial means, but rather through human capital, i.e., the intergenerational correlation in self-employment. This link is even stronger along gender lines.

Equity and Efficiency in Human Capital Investment: The Local Connection

Abstract: A general model of community formation and human capital accumulation with social spillovers and decentralized school funding is used to analyse the causes of economic segregation and its consequences for equity and efficiency. Significant polarization arises from minor differences in endowments, preferences or access to capital markets. This makes income inequality more persistent across generations, but the same need not be true for wealth. Equilibrium stratification tends to be excessive, resulting in low aggregate surplus. Whether state equalization of school resources can remedy these problems hinges on how purchased, social and family inputs interact in education and in mobility decisions.

Scaling behaviour in the growth of companies

Abstract: A SUCCESSFUL theory of corporate growth should include both the external and internal factors that affect the growth of a company1–18. Whereas traditional models emphasize production-related influences such as investment in physical capital and in research and development18, recent models10–20 recognize the equal importance of organizational infrastructure. Unfortunately, no exhaustive empirical account of the growth of companies exists by which these models can be tested. Here we present a broad, phenomenological picture of the dependence of growth on company size, derived from data for all publicly traded US manufacturing companies between 1975 and 1991. We find that, for firms with similar sales, the distribution of annual (logarithmic) growth rates has an exponential form; the spread in the distribution of rates decreases with increasing sales as a power law over seven orders of magnitude. A model wherein the probability of a company's growth depends on its past as well as present sales accounts for the former observation. As the latter observation applies to companies that manufacture products of all kinds, organizational structures common to all firms might well be stronger determinants of growth than production-related factors, which differ for companies producing different goods.

Are Business Startups Debt-Rationed?

Abstract: Using a large random sample of U.K. start-ups and a rich data set, the paper demonstrates that human capital is the 'true' determinant of survival and that the correlation between financial capital and survival is spurious. Provision of finance is demand-driven, with banks supplying funds elastically and business requests governing take-up. Firms self-select for funds on the basis of the human capital endowments of the proprietors with 'better' businesses more likely to borrow. A reason why others have seemingly identified start-up debt gaps may be the failure to test a sufficiently rich empirical model. Copyright 1996 by Royal Economic Society.

Procyclical Productivity: Increasing Returns or Cyclical Utilization?

Abstract: This paper investigates the relative importance of cyclical fluctuations in labor and capital utilization, increasing returns to scale, and technology shocks as explanations for procyclical productivity. It exploits the intuition that materials inputs do not have variable utilization rates, and materials are likely to be used in fixed proportions with value added. Therefore, materials growth is a good measure of unobserved changes in capital and labor utilization. Using this measure shows that cyclical factor utilization is very important, returns to scale are about constant, and technology shocks are small and have low correlation with either output or hours growth.

A Microfoundation for Social Increasing Returns in Human Capital Accumulation

Abstract: This paper proposes a microfoundation for social increasing returns in human capital accumulation. The underlying mechanism is a pecuniary externality due to the interaction of ex ante investments and costly bilateral search in the labor market. It is shown that the equilibrium rate of return on the human capital of a worker is increasing in the average human capital of the workforce even though all the production functions in the economy exhibit constant returns to scale, there are no technological externalities, and all workers are competing for the same jobs.

The Capital Budgeting Process: Incentives and Information

Abstract: We study the capital allocation process within firms. Observed budgeting processes are explained as a response to decentralized information and incentive problems. It is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low. We also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer. THERE IS GENERAL AGREEMENT that investment decisions are the most important decisions made by corporations. The choice of projects and the level of investment is critical not just for stakeholders of the firm but also for the economic well-being of society as a whole. It has been alleged that U.S. firms invest too little and tend to overemphasize short-term results. For example, Porter (1992), citing Poterba and Summers (1992), asserts that U.S. firms use hurdle rates to evaluate investment projects that are higher than their estimated costs of capital. To understand the investment behavior of firms, one must consider both the process by which external capital is made available to firms and the process by which internally and externally raised capital is allocated to investment projects within the firm. Considerable attention has been paid to how firms raise external capital. The fundamental insight in this area is the celebrated result of Modigliani and Miller (MM) that capital structure is irrelevant in the absence of capital market frictions. Accordingly, in the three decades since their contribution, research on how external capital is raised has focused on market frictions, including information and incentive problems. Relatively little research has focused on the internal allocation process and its relationship to the organization of the firm. Modern finance theory prescribes allocating capital according to the net present value (NPV) rule. Just as the MM result itself provides no theory of the arrangements under which

A Further Augmentation of the Solow Model and the Empirics of Economic Growth for OECD Countries

Abstract: Mankiw, Romer, and Weil [1992] showed that the augmented Solow model, including accumulation of human as well as physical capital, provides a good description of cross-country data, with the exception of the OECD subsample. The textbook Solow model explains about 60 percent of the cross-country variation in per worker GDP in a comprehensive sample of 98 nonoil-producing countries. By including human capital, the augmented Solow model accounts for almost 80 percent of the variation in this sample. For the OECD subsample, explanatory power of the models is rather poor. The textbook Solow model explains very little of the variation in per capita income levels (less than 6 percent). The performance of the Mankiw-Romer-Weil [1992] human capital augmented model is somewhat better but still less than 30 percent. Differences in explanatory power between samples largely disappear in specifications that allow for departures from the steady state. Mankiw, Romer, and Weil interpret this finding by conjecturing that OECD countries are perhaps farther from their steady-state levels than countries in the broader sample. The difference in explanatory power of the augmented Solow model in a broader sample versus the OECD sample is possibly due to the similarity of the OECD countries and the limited variation in explanatory variables. An alternative explanation offered here is that not all relevant factors of production are included. We therefore suggest a further augmentation of the Solow model by explicitly including the (endogenous) accumulation of technological know-how.

Capital Account Liberalization as a Signal

Abstract: We present a model in which a government's current capital controls policy signals future policies. Controls on capital outflows evolve in response to news on technology, conditional on government attitudes towards taxation of capital. When there is uncertainty over government types, a policy of liberal capital outflows sends a favorable signal that may trigger a capital inflow. This prediction is consistent with the experience of several countries that have liberalized their capital account

The Future of Capitalism : How Today's Economic Forces Shape Tomorrow's World

Abstract: "Survival of the fittest" capitalism stands alone and apparently trimphant. Communism has collapsed and the social welfare state is breaking down everywhere. But technology and ideology are shaking the foundations of 21st-century capitalism. Technology is making skills and knowledge the only sources of sustainable strategic advantage. Abetted by the electronic media, ideology is moving toward the consumer's instant gratification. A new capitalism must emerge, one in which the ownership of skills ("man-made brainpower") instead of physical capital is the key strategic asset. Economic success will depend upon our willingness and ability to make long-term social investments in skills, education, knowledge and infrastructure. The intrinsic problems of capitalism (instability, rising inequality) are still waiting to be solved, but so are a new set of problems - and opportunities - that flow from capitalism's growing dependence upon human capital and man-made brainpower industries. In this era of massive economic and political change as five great "tectonic plates" of capitalism reshape the future, those who win will learn to play a new game with new rules requiring new strategies. Tomorrow's winners will have very different characteristics than today's winners. When technology and ideology start moving apart, the only question is when will the "big one" (the earthquake that rocks the system) occur? Paradoxically at a time when capitalism finds itself at the "end of history" with no social and political competitors, it will have to undergo a profound metamorphosis. This work analyzes the future of capitalism, and charts a course for surviving and winning in the years ahead. Lester Thurow is the author of "Head to Head" and "The Zero-Sum Society".

Human Capital Pricing Equations with an Application to Estimating the Effect of Schooling Quality on Earnings

Abstract: This paper formulates and estimates alternative models for the pricing of labor services. We present economic models that rationalize empirical specifications in the literature and we offer evidence on the validity of those specifications. Widely used efficiency units models of labor services are inconsistent with evidence from the U.S. labor market. A model of heterogeneous skills provides a more accurate description of earnings data. We present evidence that the pursuit of comparative advantage and selective migration are important features of the U.S. labor market. When these features are included in the model, the only support for an effect of schooling quality on earnings is through the return to college education. Three interactions are empirically important in explaining log wage equations: (A) between schooling quality and education, (B) between regional labor market shocks and education and (C) between region-of-residence and regionof-birth. Because of this third interaction, which can arise from comparative advantage in the labor market, no unique quality effect on returns to education can be defined independently of the market in which it is used.

Human Capital Investment under Asymmetric Information: The Pigovian Conjecture Revisited

Abstract: This article investigates how human capital investment, labor turnover, and wages are jointly determined when the current employer knows more about a worker's productivity than potential employers. Results derived are quite different from, or unexplored by, the standard human capital theory. We show that the information asymmetry can cause an externality distortion in human capital investment because higher productivity due to the investment may not be recognized by the market. The investment level increases in the degree of firm specificity of human capital. The underinvestment problem is more severe when human capital is general than when it is firm-specific.

Dependency, Disarticulation, and Denominator Effects: Another Look at Foreign Capital Penetration

Abstract: Less developed countries desparately need capital to develop, but countries dependent on foreign capital face slower economic growth, higher income inequality, and possibly impaired domestic capital formation. These conclusions emerge from a reassessment of Glenn Firebaugh's broad critique of capital dependency research, which exposed an important error in earlier studies. The solution charts new theoreticall ground by factoring dependency effects into the differential productivity of foreign and domestic investment and the negative externalities from foreign capital penetration. The revised formulation is applied to cross-national analyses of economic growth, decapitalization, and income inequality. The findings consistently support capital dependency theory.

Equity Markets, Transactions Costs, and Capital Accumulation: An Illustration

Abstract: Poorly developed equity markets inhibit the transfer of capital ownership. Moreover, the costs of transacting in equity markets affect not just the level of investment, but the kinds of investments that are undertaken. Once equity markets allow the ownership of capital to be transferred economically, reductions in costs tend to favor the use of longer-maturity investments. When there is a relationship between the maturity of an investment and its productivity, transactions cost reductions are conducive to observing certain kinds of increases in productive efficiency. This article analyzes savings, investment, and consumption decisions by using an overlapping generation’s model with two-period-lived agents. The analysis allows for several technologies for converting current output into future capital that varies by productivity and maturity, and it makes ownership of capital costly to transfer. A reduction in transactions costs will typically alter the composition of savings and investment, and have potentially complicated consequences for capital accumulation and steady state output.

Estimation of the depreciation rate of physical and r&d capital in the u.s. total manufacturing sector

Abstract: I. INTRODUCTION Numerous studies on production and cost, the sources of productivity, and endogenous growth have recognized the pivotal role of the physical capital stock. Studies at various levels of aggregation over assets and industries have emphasized the crucial role of investment in plant and equipment in the growth of demand and productive capacity. It is clearly recognized by economists and policymakers that knowledge capital, approximated by RD 1986], to measure the depreciation rates of the stock of RD 1980]. In the literature on dynamic demand models such an approach was first adopted by Epstein and Denny [1980] and more recently by Kollintzas and Choi [1985] for a single capital good, and on a theoretical level in Bernstein and Nadiri [1987a; 1987b]. The paper is organized as follows. The specification of the model is presented in section II. Section III is devoted to a discussion of the data and to the presentation of the parameter estimates of the model. In section IV we present the empirical results for the depreciation rates for physical and R&D capital and compare them with those reported in the literature. We compare the physical capital stock estimates generated by our model with the "official" capital stock estimates produced by U.S. Department of Commerce, Bureau of Economic Analysis. In this section we also present our estimates of the decomposition of gross investment into replacement and expansion investment for both physical and R&D capital. These decompositions are important from the vantage point of public policy analysis. …

Free trade, factor returns, and factor accumulation

Abstract: A model of development is studied in which physical capital and unskilled labor are good substitutes, and skilled labor is complementary to the resulting aggregate. Growth in a closed economy is compared with two open regimes. Inflows of physical capital only reduce the interest rate and raise both wage rates. The skilled wage rises more sharply, however, increasing the skill premium and accelerating human capital accumulation. Full integration with a larger and more developed neighbor also reduces the interest rate and raises both wage rates, but in this case the skill premium falls and human capital accumulation changes very little.

Counting outputs, capital inputs and caring labor: Estimating gross household product

Abstract: The estimation of Gross Household Product, the economic value added by the unpaid work and own capital of households outside the boundary of the System of National Accounts, should be addressed through household input-output satellite accounts which count household outputs, value them at market prices, and include an allowance for capital as a factor of production. This paper uses internationally comparable survey data to estimate the relative magnitudes of the gender division of the millions of hours of paid, unpaid and total work in twelve OECD countries, puts a dollar value on Gross Household Product in Australia, looks more closely at who provides care and nurture in households and suggests some urgent issues for attention.

Education and agricultural productivity: Evidence from Uganda

Abstract: Existing evidence on the impact of education on agricultural productivity in Africa is mixed, with estimates usually insignificant although sometimes large Analysis of the first nationally representative household survey of Uganda gives an estimate of the impact of household primary schooling on crop production comparable to the developing country average In addition, the primary schooling of neighbouring farm workers appears to raise crop production and these external returns exceed the internal returns Education complements capital and substitutes for labour Further productivity increases arise through education increasing physical capital and purchased inputs, but effects via crop choice appear negligible

The Productivity of Nations

Abstract: Output per worker varies enormously across countries Why? Our analysis shows that differences in governmental, cultural, and natural infrastructure are important sources of this variation According to our results, a high-productivity country (i) has institutions that favor production over diversion, (ii) is open to international trade, (iii) has at least some private ownership, (iv) speaks an international language, and (v) is located in a temperate latitude far from the equator A favorable infrastructure helps a country both by stimulating the accumulation of human and physical capital and by raising its total factor productivity

Mind Your P's and Q's: The Cost of Public Investment is Not the Value of Public Capital

Abstract: A dollar's worth of public investment spending often does not create a dollar's worth of capital, especially in developing countries One deep difficulty of development may be that even when public capital is productive it may be difficult to create this capital in the public sector Pritchett presents theory and calculations to show that part of the explanation of slow growth in many poor countries is not that governments did not spend on investments, but that these investments did not create productive capital For a variety of reasons, governments take resources from current consumption to invest in the economic equivalent of pyramids, items that produce no future output The most critical assumption (of the many) necessary for cumulated investment flows to be even reasonable proxies for capital stocks is that the cost of investment (the p's) is equal to the value of the capital stock evaluated as its increment to future profitability (the q's) This assumption can be justified only if investors act to equalize these - and under many conditions, profit-maximizing investors will do so But there is ample reason not to believe that all governments act as profit-maximizing investors - and ample reason to believe that some governments invest better than others The implication, especially in developing countries, is that a dollar's worth of public investment spending often does not create a dollar's worth of public capital A variety of calculations suggest that in a typical developing country less than 50 cents of capital were created for each public dollar invested One of the deep difficulties of development may well be that even when public capital is productive it may be difficult to create this capital in the public sector This paper - a product of the Poverty and Human Resources Division, Policy Research Department - is part of a larger effort in the department to investigate the impact of policies on long run economic growth

Managing Bank Capital: Capital Allocation and Performance Measurement

Abstract: Introduction: Capital Allocation in Banking. THE ROLE AND DEFINITION OF CAPITAL. The Role of Capital. Capital--Based Management Techniques. THE TREASURERa S PERSPECTIVE. Managing the Available Capital Base. Capital Instruments. Capital Allocation versus Capital Investment. THE REGULATORa S PERSPECTIVE. Regulatory Capital Requirements. The Basel Accord. Current Problems and Future Developments: Towards an Internal--Models Based Approach? THE RISK MANAGERa S PERSPECTIVE. Asset Volatility as a Capital Allocation Tool. Modelling Market Risk. Modelling Credit Risk. Modelling Operational and Other Risks. THE SHAREHOLDERa S PERSPECTIVE. Earnings--at--Risk as a Capital Allocation Tool. Modelling Earnings--at--Risk. AN HOLISTIC APPROACH TO CAPITAL MANAGEMENT. Implementing Capital Allocation Policies and Procedures. Economic Profit and Shareholder Value. Determining the Cost of Capital: A Stock Market Perspective. Practical Issues in Implementation. CONCLUSION. Glossary of Terms. Index.

Issues in the measurement of economic depreciation introductory remarks

Abstract: I. INTRODUCTION Most capital goods are used up in the process of producing output. Machine tools wear out, trucks break down, electronic equipment becomes obsolete. When an asset reaches a point at which it is no longer economical to repair and maintain, it is withdrawn from service. As the physical deterioration and retirement of assets cause the productive capacity to decline to zero, a parallel loss in asset financial value occurs. This depreciation of value is a cost that must be subtracted from gross revenue in order to determine the income accruing to the asset. It is also the amount that must be added to the balance sheet in order to keep wealth intact. These are relatively straightforward distinctions that are routinely used in various fields of economics: in studies of economic growth, particularly in the new growth theory with its focus on the role of capital formation; in environmental economics, with its concerns about sustainable growth; in production theory with the study of capital formation; in industrial organization with issues involving the rate of return to capital; and in public finance, with its interest in the taxation of income from capital. It is therefore perplexing that these important distinctions have been the source of much confusion and error. It is common, for example, to see "deterioration" called "depreciation," though the former is a quantity concept and the latter refers to financial value. Other confusions have led to the inference that there are two logically separate concepts of capital, one appropriate for wealth accounting and the other for the study of productivity and growth. Part of the problem lies with the historic confusion and controversy within capital theory itself. The controversy is manifest in academic debates over the role of capital in economic growth (viz. the "Cambridge Controversies" in capital theory). A major source of difficulty arises from the fact that, by definition, a capital good yields its services over the course of several years and the fact that capital goods are generally owner utilized. This leads to a fundamental difference vis a vis non-capital inputs like labor and materials that complicates the measurement problem enormously and necessitates the use of imputational methods and approximations to get at the underlying economic prices and quantities. Unlike labor, which is purely an input, capital goods are both inputs and outputs of the production process, and this fact adds yet another dimension to the analysis. In the spring of 1992 the current state of research on capital, wealth, and depreciation was the subject of a one-day Conference on Research in Income and Wealth symposium, held in Washington D.C. at the Board of Governors of the Federal Reserve under the auspices of the National Bureau of Economic Research. This symposium ranged over many of the issues in the measurement of economic depreciation, and presented both an appraisal of past research and an important set of new results. The five following papers of this issue of Economic Inquiry are devoted to the proceedings of the workshop in the hope that further research interest will be stimulated in this crucial and under-researched branch of economics. II. ISSUES IN DEPRECIATION ANALYSIS Given the history of confusion surrounding the concept of economic depreciation, it would seem useful to precede the conference papers with a few introductory remarks about the problem of depreciation. We will start with the simple example of a small manufacturing company that owns three machines: one that was purchased at the beginning of the current year (1996) at a cost of $100,000, one purchased five years ago at a cost of $80,000, and one purchased twenty years ago for $40,000. The three machines are intended to perform the same set of tasks and are essentially the same, except for wear and tear due to age and to design improvements that have occurred over time. …

Learning, Wage Dynamics, and Firm-Specific Human Capital

Abstract: We introduce a dynamic and fully strategic model of wage determination in the presence of firm-specific human capital. In this model, human capital is interpreted as information. We show that equilibrium exists and is efficient and that it gives rise to a unique distribution of the social surplus. We show further that the equilibrium wage is determined by three factors. Consideration of these factors allows us to determine when and how the market mechanism enables the worker to capture some of the returns to firm-specific human capital. We relate our findings to the ongoing empirical debate concerning the return to tenure.

Technology and changes in skill structure: evidence from an international panel of industries

Abstract: Much of the dramatic change in skill and wage structure observed in recent years in the United States is believed to stem from the impact of new technology. This paper compares the changing skill structure of wages and employment in the United States with three other advanced developed countries - the UK (where wage inequality has risen even faster in the 1980s than in the US), Denmark (where unemployment has risen, but wage inequality but not grown very much) and Sweden (where wage inequality and unemployment has remained has remained stable over our sample). We base most of our analysis on a newly constructed panel of two-digit industries covering 17 years but also, where necessary, use other data sources at various levels of aggregation. We investigate how far technical change can explain the growth of the share of skilled workers (by occupation or education) has occurred in all countries. Like the US, most of this shift towards an increased usage of more skilled workers has occurred within industries. Furthermore, evidence of the complementarily of human capital with physical capital and with new technology is uncovered in all four countries. Nevertheless, technology can only account for a relatively small part (about 1/4) of the changes in the skill structure of the labour marker in the Anglo-American nations. In Sweden, however, a substantial part of the change is accounted for by technology. It seems likely like, over and above any effect from skill biased technological change, the observed changes in skill structure in Britain and America are also linked to the structure of labourr market institutions, such as the declining role of trade unions and collective bargaining.

Economic development, growth of human capital, and the dynamics of the wage structure

Abstract: In this paper I elucidate the sources of growth of human capital in the course of economic development. On the supply side (Section 1) I include the growth of family income, urbanization, the demographic transition, and the rising cost of time.The supply side alone cannot explain the continuous growth of human capital as it implies a self limiting decline in rates of return below those in alternative investments. Such declines are offset by growing demands for human capital in the labor market. Growth of demand for labor skills is a function of capital accumulation and of technological changes. Evidence on this hypothesis is summarized in Section 2 and on supply responses to growing demand for human capital in Section 3. Changes in the skill and wage structures in the labor market are an important part of the evidence.The reciprocal relation between economic growth and the growth of human capital is likely to be an important key to sustained economic growth. A caveat applies to indirect effects of economic growth on family instability, which may lead to a deterioration of childhood human capital in some sectors of society.

Rational Capital Budgeting in an Irrational World

Abstract: This paper addresses the following basic capital budgeting question: Suppose that cross-sectional differences in stock returns can be predicted based on variables other than beta (e.g., book-to- market), and that this predictability reflects market irrationality rather than compensation for fundamental risk. In this setting, how should companies determine hurdle rates? I show how factors such as managerial time horizons and financial constraints affect the optimal hurdle rate. Under some circumstances, beta can be useful as a capital budgeting tool, even if it is of no use in predicting stock returns.