Martin Gornig, Bernd Görzig, Axel Werwatz
Numerous empirical studies document persistent inter-sectoral differences in the rate of return on capital. From a theoretical perspective, persistent rate of return differences indicate inefficiency and point to a lack of competition. However, such an interpretation is valid only if returns are accurately measured. Maybe it is a lack of measurement rather than a lack of competition which is responsible for the evidence. Our analysis of sectoral rates of return explores these issues in four steps. We first test this prediction using conventionally measured rates of return for the sectors of the German economy using a long time-horizon (step1). We then check whether the distribution of returns to capital across sectors is more in line with an equilibrating mechanism once we adjust returns for risk (step 2) and intangible capital (step 3). Finally, we investigate whether remaining permanent differences in adjusted returns can be explained by measures of competitive pressure (step 4). Our analyses for Germany show: differences in profit rates between industries have been persistent over almost 40 years. Yet, we can also show that by accounting for differences in risk between industries, the sectoral differences in profit rates can noticeably be reduced. They shrink even more when accounting for the influence of intangible capital on profits. However even after these adjustments, considerable differences persist. They are correlated to differencesin the competition intensity between sectors. But even accounting for those differences, there still persist a considerable remainder of unexplained variation.
JEL-Classification: L23;E01;D24
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