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Modeling and Measuring Organization Capital

Staff Report 291 | Published February 1, 2005

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Modeling and Measuring Organization Capital

Abstract

Manufacturing plants have a clear life cycle: they are born small, grow substantially as they age, and eventually die. Economists have long thought that this life cycle is driven by the accumulation of plant-specific knowledge, here called organization capital. Theory suggests that where plants are in the life cycle determines the size of the payments, or dividends, plant owners receive from organization capital. These payments are compensation for the interest cost to plant owners of waiting for their plants to grow. We build a quantitative growth model of the life cycle of plants and use it, along with U.S. data, to infer the overall size of these payments. They turn out to be quite large—more than one-third the size of the payments plant owners receive from physical capital, net of new investment, and more than 40% of payments from all forms of intangible capital.


Published in: _Journal of Political Economy_ (Vol. 113, No. 5, October 2005, pp. 1026-1053) https://doi.org/10.1086/431289.