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Inequality

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  • Jan Eeckhout
  • Boyan Jovanovic

Abstract

In a growth model, rent-grabbing and free riding can give rise to inequality in productivity and firm size. Inequality among firms affects a firm's incentive to free ride or to grab rents, and, hence, the incentive to invest in research and training We follow Lucas and Prescott (1971) and Hayashi (1982) and assume constant returns in production and in adjustment costs for investment, and perfect capital markets. Our conclusion, however, differs starkly from theirs: Average Tobin's q generally exceeds marginal q. That is, the unit value of capital is lower in big firms, and evidence dating back to Fazzari, Hubbard, and Petersen (1988) supports this claim quite decisively. Such evidence is usually taken to imply that small firms invest at a rate lower than its perfect capital market rate. In our model, however, it arises because small firms rely more on copying than big firms do: The marginal product of capital is equal across firms, but its average product is higher than that because small firms get a disproportionately high external benefit.

Suggested Citation

  • Jan Eeckhout & Boyan Jovanovic, 1998. "Inequality," NBER Working Papers 6841, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6841
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    References listed on IDEAS

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    1. Benabou, Roland, 1996. "Heterogeneity, Stratification, and Growth: Macroeconomic Implications of Community Structure and School Finance," American Economic Review, American Economic Association, vol. 86(3), pages 584-609, June.
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    Cited by:

    1. Shaffer, Sherrill, 2002. "Firm size and economic growth," Economics Letters, Elsevier, vol. 76(2), pages 195-203, July.
    2. Sherrill Shaffer, 2006. "Establishment Size and Local Employment Growth," Small Business Economics, Springer, vol. 26(5), pages 439-454, June.
    3. Jan Eeckhout, "undated". "Competing Norms of Cooperation," Penn CARESS Working Papers fa8d3cedc3b97259070110325, Penn Economics Department.
    4. Sherrill Shaffer, 2006. "Establishment Size by Sector and County-Level Economic Growth," Small Business Economics, Springer, vol. 26(2), pages 145-154, March.

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    More about this item

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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