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Intangible Capital Aspects of Advertising and R&D Expenditures

Many researchers have argued that this is caused by increases in concentration and market power in the US economy. Grullon et al. (2017) showed an increase in concentration in US industries in the last two decades. De Loecker and Eeckhout (2017) demonstrated an increase in market power of firms as measured by mark-ups. Baker and Salop (2016) directly linked a decline in anti-trust statutes’ enforcement to increases in concentration and rising inequality in the US. Barkai (2017) and Autor et al. (2017) linked concentrated winner-take-all markets with the fall in the labour share in the US, to explain the rise of the superstar firms. 

In a recent paper (Ayyagari et al. 2018), we investigate whether this rise in ROIC and mark-ups is related to the mismeasurement of intangible capital. Using data on listed firms in the US, we were able to show that, when capital stock is adjusted for intangible capital, both the dispersion and the rise in ROIC disappear. The evidence that superstar firms have higher mark-ups than other firms, or are limiting output compared to these firms, is limited.

Economists have long studied the mismeasurement of intangible capital, in particular R&D capital and organisational capital, for example Grabowski and Mueller (1978), Hirschey (1982), and Corrado et al. (2009).1 We follow the most recent approach in Peters and Taylor (2017), adjusting standard financial statements for firm-level stocks and flows of R&D and organisational capital.