Description:

Speaker: Jacob Gosselin

Title:

Negative Earnings, Market Power, and Demand vs. Supply Shifting Investment

Abstract: We document the rise in reported losses among public firms in the United States, and show that this rise is driven by changes in investment composition: firms invest less in physical capital and more in intangible “brand” capital than they used to. We provide evidence linking this phenomena to the rise in mark-ups over the same period. We rationalize these empirical results with a GE model of heterogenous, monopolistically competitive firms investing in supply-shifting and demand-shifting capital stocks. We derive the relative returns to both types of investment in our model, and show that it is linear in the mark-up. We conclude with a quantitative exercise, solving for the stationary distribution of firms in our model (calibrated to Compustat data) under different mark-ups, to emphasize that this mechanism means our model can qualitatively match the data.