Capital Reallocation and Private Firm Dynamics

Anmol Bhandari, Paolo Martellini and Ellen McGrattan

No 34319, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a theory of private firms whose primary business capital is internally created, cannot be rented, and is reallocated through infrequent, indivisible sales. The equilibrium allocation is efficient but exhibits dispersion in marginal products, returns, and transferable shares of business value. U.S. tax data are used to estimate technology parameters and evaluate tax reforms. An undistorted tax system uniformly taxes labor income, business income, and realized gains, while fully expensing purchased and internal investment. Under current tax bases, eliminating capital-gains taxation yields the lowest deadweight loss among a range of simple reforms, by increasing entry and capital reallocation.

JEL-codes: E22 E6 (search for similar items in EconPapers)
Date: 2025-10
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-dge
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