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Departmental Seminar: Sweat Equity in U.S. Private Business

Dates:
  • Thu 14 Feb 2019 11.00 - 12.15
  Add to Calendar 2019-02-14 11:00 2019-02-14 12:15 Europe/Paris Departmental Seminar: Sweat Equity in U.S. Private Business

In this paper, we first provide evidence that existing measures of business incomes and valuations based on widely used surveys such as the Survey of Consumer Finances are mismeasured. We then develop a theory disciplined by U.S. national accounts and business census data to measure net incomes and private business sweat equity—which is the value of time to build customer bases, client lists, and other intangible assets. We estimate an aggregate sweat equity value of 0.65 times GDP, with little cross-sectional dispersion in valuations when compared to business net incomes
and large cross-sectional dispersion in rates of return. Our estimate of sweat equity is close to the
estimate of marketable fixed assets used in production by private businesses, implying a high ratio of intangible to total assets. We use the model to evaluate the impact of greater tax compliance
of private businesses and lower tax rates on the net income of both privately held and publicly traded businesses. We find larger sectoral and aggregate effects from the tax policy experiments relative to studies that abstract from private business and, in particular, the accumulation of sweat capital. Finally, we show that our results are robust to including nonpecuniary benefits of business ownership.
Co-authors: Anmol Bhandari, University of Minnesota
Keywords: Intangibles; Business valuation
JEL classification: E13, E22, H25

Conference Room, Villa la Fonte DD/MM/YYYY
  Conference Room, Villa la Fonte

In this paper, we first provide evidence that existing measures of business incomes and valuations based on widely used surveys such as the Survey of Consumer Finances are mismeasured. We then develop a theory disciplined by U.S. national accounts and business census data to measure net incomes and private business sweat equity—which is the value of time to build customer bases, client lists, and other intangible assets. We estimate an aggregate sweat equity value of 0.65 times GDP, with little cross-sectional dispersion in valuations when compared to business net incomes
and large cross-sectional dispersion in rates of return. Our estimate of sweat equity is close to the
estimate of marketable fixed assets used in production by private businesses, implying a high ratio of intangible to total assets. We use the model to evaluate the impact of greater tax compliance
of private businesses and lower tax rates on the net income of both privately held and publicly traded businesses. We find larger sectoral and aggregate effects from the tax policy experiments relative to studies that abstract from private business and, in particular, the accumulation of sweat capital. Finally, we show that our results are robust to including nonpecuniary benefits of business ownership.
Co-authors: Anmol Bhandari, University of Minnesota
Keywords: Intangibles; Business valuation
JEL classification: E13, E22, H25


Location:
Conference Room, Villa la Fonte

Affiliation:
Department of Economics
Robert Schuman Centre for Advanced Studies

Type:
Seminar

Organiser:
Prof. Ramon Marimon (EUI - Professor of Economics and Pierre Werner Chair)
Prof. Philipp Kircher (University of Edinburgh)

Speaker:
Prof. Ellen McGrattan (University of Minnesota and University of Minnesota and Federal Reserve Bank of Minneapolis)

Contact:
Rossella Corridori (Eco) - Send a mail
 
 

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