Showing papers on "Physical capital published in 2015"

Deciphering the fall and rise in the net capital share

Abstract: In the postwar era, developed economies have experienced two substantial trends in the net capital share of aggregate income: a rise during the last several decades, which is well-known, and a fall of comparable magnitude that continued until the 1970s, which is less well-known. Overall, the net capital share has increased since 1948, but when disaggregated this increase comes entirely from the housing sector: the contribution to net capital income from all other sectors has been zero or slightly negative, as the fall and rise have offset each other. When decomposed into a return on fixed assets and a residual share of pure profits, the fall and rise of capital income outside the housing sector in the US owes mostly to the residual: it is not paralleled by fluctuations in the measured value of non-housing capital. This observation-- combined with the theory of factor substitution, and simulation results from a multisector model--casts doubt on explanations of changes in the net capital share that rely on changes in the value of capital. There is greater support in the data for narratives that emphasize cyclical and trend variation in market power

About Capital in the Twenty-First Century

Abstract: In this article, I present three key facts about income and wealth inequality in the long run emerging from my book, Capital in the Twenty-First Century, and seek to sharpen and refocus the discussion about those trends. In particular, I clarify the role played by r > g in my analysis of wealth inequality. I also discuss some of the implications for optimal taxation, and the relation between capital-income ratios and capital shares.

The impact of human capital on economic growth

Abstract: The EU's 2020 Strategy is focused on three area of growth: smart, sustainable and inclusive that couldn’t be achieved without major contribution of skills, knowledge or value of people, common knew as human capital. It is difficult to believe that these goals could be realized without a good education and training system, a large diffusion of knowledge in manufacturing services, a creative industries and a great effort to create a research-intensive economy. Using a panel methodology, the paper tried to reveal the role of human capital as a factor of the growth and to argue that the slow investment in human capital should influence the sustainable development of the countries.

The impact of capital requirements on bank lending

Abstract: This paper estimates the impact of changing banks ’ capital requirements on bank capital ratios and bank lending. It exploits changes in bank capital requirements by banking supervisors in the United Kingdom between 1990 and 2011, provides a novel breakdown of the lending effects by economic sector and a timeline over which the effects take place. There are two key results. First, following an increase in capital requirements, banks gradually rebuild the buffers they hold over the regulatory minimum so they remain constant. Second, in the year following an increase in capital requirements, banks, on average, cut (in descending order based on point estimates) loan growth for commercial real estate, for other corporates and for household secured lending. Loan growth mostly recovers within three years. These results may help quantify how changing capital requirements might affect lending in a macroprudential policy framework.

On the Design of Contingent Capital with a Market Trigger

Abstract: Contingent capital (CC), which intends to internalize the costs of too-big-to-fail in the capital structure of large banks, has been under intense debate by policy makers and academics. We show that CC with a market trigger, in which direct stake-holders are unable to choose optimal conversion policies, does not lead to a unique competitive equilibrium, unless value transfer at conversion is not expected ex-ante. The o value transfer" restriction precludes penalizing bank managers for taking excessive risk. Multiplicity or absence of an equilibrium introduces the potential for price uncertainty, market manipulation, inecient capital allocation, and frequent conversion errors. These results point to the need to explore alternative designs of a prudential capital structure for banks. (JEL classication:

Who Captures the Value Created with Human Capital? A Market-Based View

Abstract: When firms create value with employees’ human capital, who captures this value—employees or their employing firms? This paper explains that the answer to this question depends both on the type of human capital deployed and characteristics of the labor market from which the firm hired the employees. When labor markets are highly competitive, individuals will capture more of the value their general human capital and discretionary firm-specific human capital creates, and firms and individuals will share the value created by required firm-specific and co-specialized human capital. When labor markets are less competitive, who captures the value created with a particular type of human capital depends on the reasons why the labor market is less competitive and each party’s bargaining power and negotiation skill. The paper closes with the implications of the theory developed in this paper for human resources, organizational behavior, and strategic management scholarship and practice.

Entrepreneurial regions: Do macro-psychological cultural characteristics of regions help solve the “knowledge paradox” of economics?

Abstract: In recent years, modern economies have shifted away from being based on physical capital and towards being based on new knowledge (eg, new ideas and inventions) Consequently, contemporary economic theorizing and key public policies have been based on the assumption that resources for generating knowledge (eg, education, diversity of industries) are essential for regional economic vitality However, policy makers and scholars have discovered that, contrary to expectations, the mere presence of, and investments in, new knowledge does not guarantee a high level of regional economic performance (eg, high entrepreneurship rates) To date, this "knowledge paradox" has resisted resolution We take an interdisciplinary perspective to offer a new explanation, hypothesizing that "hidden" regional culture differences serve as a crucial factor that is missing from conventional economic analyses and public policy strategies Focusing on entrepreneurial activity, we hypothesize that the statistical relation between knowledge resources and entrepreneurial vitality (ie, high entrepreneurship rates) in a region will depend on "hidden" regional differences in entrepreneurial culture To capture such "hidden" regional differences, we derive measures of entrepreneurship-prone culture from two large personality datasets from the United States (N = 935,858) and Great Britain (N = 417,217) In both countries, the findings were consistent with the knowledge-culture-interaction hypothesis A series of nine additional robustness checks underscored the robustness of these results Naturally, these purely correlational findings cannot provide direct evidence for causal processes, but the results nonetheless yield a remarkably consistent and robust picture in the two countries In doing so, the findings raise the idea of regional culture serving as a new causal candidate, potentially driving the knowledge paradox; such an explanation would be consistent with research on the psychological characteristics of entrepreneurs

Measuring Japanese bank performance: a dynamic network DEA approach

Abstract: A dynamic two-stage network model of production incorporating financial regulatory constraints is developed and estimated for Japanese commercial banks. In the first stage of production bank managers use three desirable inputs (labor, physical capital, and equity capital) to produce two intermediate outputs-deposits and other raised funds. The first stage is constrained by the level of non-performing loans produced in a preceding period. In the second stage, the bank managers use the first stage intermediate outputs to produce desirable outputs of loans and securities investments and an undesirable output of non-performing loans. The dynamic framework allows resources to be allocated over time to maximize the production of desirable outputs and simultaneously minimize the production of undesirable outputs.

Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account

Abstract: As shown in the 1930s by Hicks and Robinson, the elasticity of substitution (σ) is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of σ is vital, not only for explaining changes in the distribution of income between factors but also for undertaking policy measures to influence it. Several papers have explained the recent decline in labor's share in income by claiming that σ is greater than 1 and that there has been capital deepening. This paper presents evidence that refutes these claims. It shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the United States has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that σ is less than 1, these declines in the effective capital-labor ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation, ideally achieved through a progressive consumption tax, would raise labor's share in income.

Human Capital, Technology Adoption, and Firm Performance: Impacts of China's Higher Education Expansion in the Late 1990s

Abstract: Human capital is indispensable for firms in developing countries to adopt new technologies and improve productivity, especially in industries that employ technologies more complementary to skilled labor, given that new technologies available after the 1970s tend to be skill-biased. Taking advantage of an exogenous surge in college-educated labor force in China starting in 2003 due to a drastic centrally-devised higher education expansion policy starting in 1999 and using a generalized difference-in-differences framework, this paper finds that industries that employ more human-capital intensive technologies experience a larger gain in total factor productivity post-2003 relative to prior years; they also show larger increases in import of advanced capital goods, R&D expenditure, capital intensity, employees with more education and in skilled occupations, and total value-added. The extra productivity gains however are much weaker for domestic private firms than foreign-owned firms.

Toward a Theory of Perceived Firm-Specific Human Capital

Abstract: Strategy research suggests that firm-specific human capital is a source of sustained competitive advantage, at least in part because it may constrain employee mobility. However, it is also typically assumed that employees are reluctant to invest in firm-specific skills because such investments may come at the cost of developing general skills, thereby reducing their attractiveness in the labor market. This creates a theoretical paradox: Employee investment in firm-specific human capital is crucial for value creation and appropriation, yet there is believed to be global underinvestment in firm-specific skills. We argue that the logic behind this theory depends on the assumption that firm-specific human capital is accurately and objectively perceived among labor market participants and that relaxing this assumption significantly limits conclusions that can be drawn about competitive advantage. The key takeaway is that perceptions of firm specificity, even if inaccurate, can be more important than objective ...

Investment and the Weighted Average Cost of Capital

Abstract: In a standard q-theory model, corporate investment is negatively related to the cost of capital. Empirically, we find that the weighted average cost of capital matters for corporate investment. The form of the impact depends on how the cost of equity is measured. When the capital asset pricing model is used, firms with a high cost of equity invest more. When the implied cost of capital is used, firms with a high cost of equity invest less. The implied cost of capital may better reflect the time-varying required return on capital. The CAPM measure reflects forces that are outside the standard model.

What motivates entrepreneurial entry under economic inequality? The role of human and financial capital

Abstract: Based on a multilevel analysis of nearly 120,000 observations across 31 countries between 2001 and 2008, we provide novel insights into the moderating effects that economic inequality may have on the distinct roles that human and financial capital play on different types of entrepreneurship. As inequality increases, both forms of capital become weaker deterrents of entry into necessity entrepreneurship, whereas for opportunity entrepreneurship, only financial capital becomes a stronger predictor of entry. We also show that, regardless of inequality levels, both human and financial capital exhibit decreasing marginal returns on the likelihood of entry into necessity entrepreneurship, and that in the case of opportunity entrepreneurship, financial capital exhibits increasing marginal returns. However, inequality does impact the magnitude of marginal returns. Additionally, our statistical analysis provides quantitative support to extant literature arguing that higher levels of economic inequality foster both types of entrepreneurship albeit having a stronger impact on necessity entrepreneurship, and that human and financial capital have distinct effects on entry into necessity versus opportunity entrepreneurship. All these findings have pertinent policy implications and shed light on the under-researched role of inequality on entrepreneurship.

Working capital and firm value in an emerging market

Abstract: Purpose – The purpose of this paper is to examine the relationship between working capital efficiency and firm value and the influence of financing constraints on this relationship. Design/methodology/approach – Data from 192 firms spanning a period of ten years (1999-2008) are used for this purpose and analyzed using the ordinary least squares regression technique. Findings – The study finds that improvements in working capital efficiency through reduction in working capital investment results in higher firm value. However, this relationship is influenced by the financing constraints faced by a firm. For financially constrained firms, working capital efficiency significantly increases firm value but it is found to be insignificant for unconstrained firms. Originality/value – To the author’s knowledge, this is the first study on the value of working capital in Malaysia or in any emerging market. Most studies on working capital valuation concentrate on developed countries and that too are only a handful. H...

Bank capital management: International evidence

Abstract: We examine the dynamic behavior of bank capital using a global sample of 64 countries during the 1994-2010 period. Banks achieve deleveraging through active capital management (equity growth) rather than asset liquidation. In contrast, they achieve leveraging through passive capital management (reduced earnings retention) and substantial asset expansion (but also cash hoarding). The speed of capital structure adjustment is heterogeneous across countries. Banks make faster capital structure adjustments in countries with more stringent capital requirements, better supervisory monitoring, more developed capital markets, and high inflation. In times of crises, banks adjust their capital structure significantly more quickly.

Inclusive Wealth as a Metric of Sustainable Development

Abstract: Inclusive wealth is a measure designed to address whether society is on a sustainable development trajectory. Inclusive wealth is defined as the aggregate value of all capital assets. Increases in inclusive wealth indicate an improved productive base capable of supporting a higher standard of living in the future. To be truly inclusive, measures of inclusive wealth must include the value of all forms of capital that contribute to human well-being: human capital, manufactured capital, natural capital, and social capital. Sustainability concerns have increased attention on the ways of measuring the value of natural capital. We review various attempts to measure natural capital and to incorporate these into inclusive wealth including estimates using national wealth accounts and integrated ecological and economic models used to estimate ecosystem services. Empirically measuring the value of various types of capital in terms of a common metric is hugely challenging, and no current attempt to date can be said t...

Capital Account Opening and Wage Inequality

Abstract: Opening the capital account allows financially constrained firms to raise capital from abroad. Since capital and skilled labor are relative complements, this increases the relative demand for skilled labor versus unskilled labor, leading to higher wage inequality. Using aggregate data and exploiting variation in the timing of capital account openings across 20 mainly European countries, I find that opening the capital account increases aggregate wage inequality. In order to identify the mechanism, I use sectoral data and exploit variation in external financial dependence and capital-skill complementarity across industries. I find that capital account opening increases sectoral wage inequality, particularly in industries with both high financial needs and strong complementarity.

Effect of bank capital requirements on economic growth: a survey

Abstract: This paper reviews studies exploring how higher bank capital requirements affect economic growth. There is little evidence of a direct effect; research focuses on the indirect effects of capital requirements on credit supply, bank asset risk, and cost of bank capital, which in turn can affect economic growth. Banks facing higher capital requirements can reduce credit supply as well as decrease credit demand by raising lending rates which may slow down economic growth. However, having better-capitalized banks enhances financial stability by reducing bank risk-taking incentives and increasing banks' buffers against losses.

The Real Effects of Bank Capital Requirements

Abstract: We measure the impact of bank capital requirements on corporate borrowing and investment using loan-level data. The Basel II regulatory framework makes capital requirements vary across both banks and across firms, which allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find that a 1 percentage point increase in capital requirements reduces lending by 10%. Firms can attenuate this reduction by substituting borrowing across banks, but only partially. The resulting reduction in borrowing capacity impacts investment, but not working capital: Fixed assets are reduced by 2.6%, but lending to customers is unaffected.

Growth and Trade with Frictions: A Structural Estimation Framework

Abstract: We build and estimate a structural dynamic general equilibrium model of growth and trade. Trade affects growth through changes in consumer and producer prices that in turn stimulate or impede physical capital accumulation. At the same time, growth affects trade, directly through changes in country size and indirectly through altering the incidence of trade costs. The model combines structural gravity with a capital accumulation specification of the transition between steady states. Theory translates into an intuitive econometric system that identifies the causal impact of trade on income and growth, and also delivers estimates of the key structural parameters in our model. Counterfactual experiments based on the estimated model give evidence for strong dynamic relationships between growth and trade, resulting in doubling of the static gains from trade liberalization.

Optimal Monetary Policy and Capital Account Restrictions in a Small Open Economy

Abstract: Declines in interest rates in advanced economies during the global financial crisis resulted in surges in capital flows to emerging market economies and triggered advocacy of capital control policies. The paper evaluates the effectiveness for macroeconomic stabilization and the welfare implications of the use of capital account policies in a monetary DSGE model of a small open economy. The model features incomplete markets, imperfect asset substitutability, and nominal rigidities. In this environment, policymakers can respond to fluctuations in capital flows through capital account policies such as sterilized interventions and taxing capital inflows, in addition to conventional monetary policy. The welfare analysis suggests that optimal sterilization and capital controls are complementary policies.