Expensed and Sweat Equity

Edward C Prescott, Ellen R McGrattan

Research output: Working paper

Abstract

Expensed investments are expenditures financed by the owners of capital that increase future profitsbut, by national accounting rules, are treated as an operating expense rather than as a capitalexpenditure. Sweat investment is financed by worker-owners who allocate time to their businessand receive compensation at less than their market rate. Such investments are made with theexpectation of realizing capital gains when the business goes public or is sold. But these investmentsare not included in GDP. Taking into account hours spent building equity while ignoring the outputintroduces an error in measured productivity and distorts the picture of what is happening inthe economy. In this paper, we incorporate expensed and sweat equity in an otherwise standardbusiness cycle model. We use the model to analyze productivity in the United States during the1990s boom. We find that expensed plus sweat investment was large during this period and criticalfor understanding the dramatic rise in hours and the modest growth in measured productivity.
Original languageEnglish (US)
Pages43-85
Number of pages43
StatePublished - 2005

Publication series

NameFederal Reserve Bank of Minneapolis Working Paper

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    Prescott, E. C., & McGrattan, E. R. (2005). Expensed and Sweat Equity. (pp. 43-85). (Federal Reserve Bank of Minneapolis Working Paper).