Keywords: Tobin's q, investment, markup, scale, rents
Abstract: This paper explores some implications for valuation and investment of challenging the
standard assumption that there are no aggregate pure profits in the US economy. First,
it highlights the theoretical importance of monopoly rents for fluctuations in average Q.
A series for such rents is then computed by assuming that production is Cobb-Douglas,
as fluctuations in the output share of pure profits may be inferred from variations in the
labor share. Consequently, the paper focuses on the correlation between a measure of
rents and observable average Q. It also reassesses the empirical disconnection between
investment and a measure of marginal q purged of monopoly rents. The paper finds that
the existence of pure profits as constructed from unit labor costs only accounts for about
5% of fluctuations in observed Q, and alters only minimally the empirical relationship
between q and investment.
Full paper (370 KB PDF)
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Last update: February 17, 2004