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Asset Valuation in Economies with Production

Paper Session

Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Seaport B
Hosted By: American Finance Association
  • Chair: Martin Schneider, Stanford University

Human Capitalists

Andrea Eisfeldt
University of California-Los Angeles
Antonio Falato
Federal Reserve Board
Mindy Xiaolan
University of Texas-Austin


The widespread and growing practice of equity-based compensation has transformed high-skilled labor from a pure labor input into a class of ``human capitalists'. We show that high-skilled labor income in the form of equity claims to firms' future dividends and capital gains has dramatically increased since the 1980s. Indeed, in recent years, equity-based compensation represents almost 40% of total compensation to high-skilled labor. Ignoring such income results in incorrect measurement of the returns to high-skilled labor, with important implications for macroeconomics. Including equity-based compensation to high-skilled labor cuts the total decline in the labor share since the 1980's by over 70%, and completely reverses the decline in the high skilled labor share to an increase of 1.6%. Correctly measuring the return to high-skilled labor can thus resolve the puzzling lack of a skill premium in recent data, as well as the corresponding lack of evidence of complementarity between high-skilled labor and new-economy physical capital. Moreover, tackling the capital structure question of who owns firms' profits is necessary to provide a link between changing factor shares and changing income and wealth shares. We use a calibrated model to understand the rise of human capitalists in an economy with declining capital goods prices. Finally, we present corroborating cross section and time series regression evidence for complementarity between high-skilled labor and physical capital using our corrected measure of the total return to human capitalists.

Q: Risk, Rents, or Growth?

Alexandre Corhay
University of Toronto
Howard Kung
London Business School
Lukas Schmid
Duke University


In this paper, we ask: what drives the recent rises in aggregate valuation ratios, such as Tobin's Q or price-dividend ratios? Is it revised growth expectations, rising corporate profits induced by movements in market power, or changes in risk and risk premia? We provide a structural decomposition of these forces based on an estimated innovation-based endogenous growth model with realistic aggregate risk premia and endogenous markups. The baseline estimates suggest a critical role of changes in market structure and declines in competition in recent years in shaping i) a secular decline in growth rates, with weakened investment and innovation, and ii) rises in aggregate volatility and risk premia. Our results highlight the relevance of endogenous links between market power, future growth, and risk, absent in standard stochastic growth models. These tensions are amplified in the presence of nominal rigidities and help rationalize missing inflation and rising valuations in bond markets in recent years. Using our framework, we provide novel estimates of future growth and risk prospects conditional on the current macroeconomic environment.

Supply Chain Bargaining and Asset Prices

M. Cecilia Bustamante
University of Maryland


Any firm interacts with its customers and suppliers through pricing and investment decisions. This paper characterizes how firms' strategic interactions in supply chains affect their valuations and expected returns. We propose a real options model of strategic bargaining between a customer and a supplier that endogenizes how supply chain revenues are split over time, and how customers and suppliers match in the economy. We find that larger firms with more diversified sales and exposed to weaker competitive threats extract a larger fraction of total value from their supply chain. Moreover, since negotiations are forward-looking, a firm with higher vertical bargaining power relies on transfer prices to extract her supply chain peer's future continuation value. Hence vertical bargaining power enhances firms' values, but also makes firms riskier. Co-movement in expected returns between customers and suppliers is lower with large differences in their bargaining power. The evidence is consistent with these predictions.

Granular Economies

Jules van Binsbergen
University of Pennsylvania
Christian Opp
University of Rochester


We present a novel modeling approach for granular general equilibrium economies with persistent heterogeneity that yields exact global solutions. A key feature of our approach is the use of stochastic lumpy adjustment (SLA) technologies. The associated stochastic structure can capture any degree of granularity in adjustments of asset positions, and is thus more flexible than standard technologies. We show how SLA technologies can be employed in the context of both capital investment and the trading of financial assets. As our approach does not impose any restrictions on the shape of the state variable distribution, it can also be used to evaluate the conditions under which previous solution methods are likely to succeed. Obtaining exact solutions in these granular economies primarily involves inverting sparse matrices, a computational operation that can take full advantage of recent advances in high-performance parallel computing architectures.
Anmol Bhandari
University of Minnesota
Gauti Eggertsson
Brown University
Gill Segal
University of North Carolina-Chapel Hill
Stephen J. Terry
Boston University
JEL Classifications
  • G1 - General Financial Markets