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Valuation, investment and the pure profit share

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  • Pierre Lafourcade

Abstract

This paper explores some implications for valuation and investment of challenging the standard assumption that there are no aggregate pure profits in the US economy. First, it highlights the theoretical importance of monopoly rents for fluctuations in average Q. A series for such rents is then computed by assuming that production is Cobb-Douglas, as fluctuations in the output share of pure profits may be inferred from variations in the labor share. Consequently, the paper focuses on the correlation between a measure of rents and observable average Q. It also reassesses the empirical disconnection between investment and a measure of marginal q purged of monopoly rents. The paper finds that the existence of pure profits as constructed from unit labor costs only accounts for about 5% of fluctuations in observed Q, and alters only minimally the empirical relationship between q and investment.

Suggested Citation

  • Pierre Lafourcade, 2004. "Valuation, investment and the pure profit share," Finance and Economics Discussion Series 2004-08, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2004-08
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    References listed on IDEAS

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    Keywords

    Investments; Rent (Economic theory);

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