Why Are Returns to Private Business Wealth So Dispersed?

We use firm-level data from Orbis to document that average returns to private business wealth are dispersed and persistent, and that firms experience large and fat-tailed changes in output that are not fully accompanied by changes in their capital stock and wage bill, and therefore generate large changes in firm profits. We interpret this evidence using a model of entrepreneurial dynamics in which return heterogeneity arises from both limited span of control, as well as from financial frictions which generate differences in marginal returns to wealth. The model matches the evidence on average returns and predicts that marginal returns are three fourths as dispersed as average returns, mostly reflecting risk as opposed to collateral constraints. Though financial frictions greatly depress individual firms' production choices and cash flows, they generate relatively modest productivity and output losses in the aggregate.