Sweat Equity in U.S. Private Business

Research output: Contribution to journalArticlepeer-review

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 in the private business sector equal to 1.2 times U.S. GDP, which is about the same magnitude as the value of fixed assets in use in these businesses. For a typical owner, 26% of the sweat equity is transferable through inheritance or sale. The equity values are positively correlated with business incomes and standard measures of markups based on accounting data, but not with owners' financial assets or standard measures of business total factor productivity. We use our theory to show that abstracting from sweat activity leads to a significant understatement of the effects of lowering business income tax rates on private business activity for both the extensive and intensive margins. Despite finding larger responses, our model's implied tax elasticities of establishments and owner hours are in line with empirical estimates in the public finance literature. Allowing for financial constraints and superstar firms does not overturn our main findings.

Original languageEnglish (US)
Pages (from-to)727-781
Number of pages55
JournalQuarterly Journal of Economics
Volume136
Issue number2
DOIs
StatePublished - May 1 2021

Bibliographical note

Funding Information:
The National Science Foundation (Award #1657891)

Publisher Copyright:
© 2020 The Author(s) 2020. Published by Oxford University Press on behalf of the President and Fellows of Harvard College.

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