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Intangible capital is not a distinct factor of production as is
physical capital or labor. Rather it is the "glue" that creates
value from other factor inputs. This perspective naturally suggests
an empirical model in which intangible capital is defined in terms
of adjustment costs. My estimates of these adjustment costs from
firm-level panel data suggest that no appreciable intangibles are
associated with R&D and advertising, whereas information
technology creates intangibles with a 72% annual rate of return--a
sizable figure that is nevertheless much smaller than that reported
in previous studies. To build a bridge to previous research, I show
that much larger estimates can be obtained with ordinary least
squares, a method that ignores the possibility that the value of
the firm and its investment policy are simultaneously determined.
One of the most basic principles in economics is that competitive
pressure promotes efficiency. However, this pressure can also have
a dark side because it makes firms reluctant to act on private
information that is unpopular with consumers. As a result, firms
that possess superior information about the consequences of their
actions for consumers' welfare may choose not to use it. We develop
this idea in a simple model of delegated investment in which agents
are fully rational and risk neutral, and agency problems are
absent. We show that competitive pressure obliges firms to make
inefficient decisions when their information advantage over
consumers is relatively small. This result could be applied to a
broad range of economically important situations.
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