“How Does Firm Heterogeneity Matter for Aggregate Dynamics? Evidence from Factor Allocation” by Thomas Winberry
University of Chicago Booth School of Business
Firms vary tremendously in their productivity, investment, and hiring, implying that frictions impeding the allocation of factors affect aggregate dynamics. Given that heterogeneity is ubiquitous, researchers face hard choices about which frictions to include in macroeconomic models. In this paper, we take a step back from individual frictions and directly study the allocation of capital and labor over time. We characterize the allocation in terms of the distribution of marginal products and measure the time series of this distribution in Compustat, 1964 – 2014. Frictions to equating both the marginal products of capital and labor are substantial, have grown over time, and vary systematically over the business cycle. Labor frictions become more important in expansions, dampening the cycle, while capital frictions become less important in expansions, amplifying the cycle. However, the Great Recession did not lead to abnormally high dispersion. We explore the implications of our findings for business cycle models with firm heterogeneity.