Finance seminar presented by Enrico Perotti (Amsterdam)

Redistributive Growth

Abstract: We study the long term effect of a gradual technological shift to intangible capital. Intangible creation relies on the commitment of skilled human capital in production. As human capital cannot be owned by firms nor be committed, firms reward it by deferred compensation, while their funding needs drop. As its future income is not tradeable, total investable assets fall, leading to a gradual fall in interest rates while surplus savings are stored in rising asset valuations. The shift leads to increasing inequality and skewness in both the capital and labor income share. The combination of rising house prices and wage inequality leads to higher household leverage and rising mortgage default risk.

Creating Intangible Capital

Abstract: We propose a new framework for intangible capital creation by the joint investment of firm resources and skilled human capital, subject to a double moral hazard. First, key employees are free to leave with some intangibles, so firms must reward them in deferred form, creating uninsurable risk. Thus high-intangible firms require less upfront funding and have larger free cash flow, yet still follow a prudent financial policy to insure unvested claims. Second, firm spending on intangible investment is easily diverted. Promising large payoffs to human capital exacerbates moral hazard, as diversion prompts skilled employees to depart and forfeit unvested claims. Balancing incentives requires firms to have more cash in good states (to reduce the cost of compensation), and more inside equity to avoid diversion risk. The model can explain several puzzling trends and generates new implications for measuring investment, firm value, and returns to labor.