The return on capital in disaggregated economies: theory and measurement

Working paper

We develop a dynamic general equilibrium model of disaggregated economies with heterogeneous firms and flexible demand and production functions. The model delivers a non-parametric, closed-form decomposition of the aggregate return on capital into the risk-free rate, and firm-level profits, capital gains, risk premia, and capital wedges. Using U.S. data, we show that once profits are accounted for, the true return on capital has fallen from 9% to 6% since 1982, though it remains above the risk-free rate. Capital wedges–driven by reallocation toward new high-wedge cohorts–are the key obstacle, and removing them would raise aggregate productivity by 2–13%.

Authors: Chiavari, A; Faltermeier, J; Singh Goraya, S

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Place of publication: Oxford
• Publication date: 2025-12-15
• Paper number: 1100
• Language: English
• Keywords: risk-free rate; misallocation; profits; risk premia; return on capital