Sweat Equity in U.S. Private Business

Anmol Bhandari and Ellen McGrattan

No 24520, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theory of sweat equity—the value of business owners’ time and expenses to build customer bases, client lists, and other intangible assets. We discipline the theory using data from U.S. national accounts, business censuses, and brokered sales to estimate a value for sweat equity for the private business sector equal to 1.2 times U.S. GDP, which is roughly the value of fixed assets in use in these businesses. Although latent, the equity values are positively correlated with business incomes, ages, and standard measures of markups based on accounting data, but not with financial assets of owners or standard measures of business total factor productivity (TFP). We use our theory to show that abstracting from sweat activity leads to a significant understatement of the impacts of lowering business income tax rates on both the extensive and intensive margins. We also document large differences in the effective tax rates and the effects of tax changes for owner and employee labor inputs. Lower tax rates on owners result in increased self-employment rates and smaller firm sizes, whereas lower rates on employees have the opposite effect. Allowing for financial constraints and superstar firms does not overturn our main findings.

JEL-codes: E13 E22 H25 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-acc, nep-dge and nep-mac
Note: EFG PE PR
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Citations: View citations in EconPapers (9)

Published as Anmol Bhandari & Ellen R McGrattan, 2021. "Sweat Equity in U.S. Private Business*," The Quarterly Journal of Economics, vol 136(2), pages 727-781.

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Related works:
Working Paper: Sweat Equity in U.S. Private Business (2018)
Working Paper: Sweat Equity in U.S. Private Business (2017)
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