Intangible Capital, Firm Scope, and Growth

How do intangible assets differ from physical capital, like machines? We develop a model of intangible assets focusing on two defining properties: they can be replicated across locations, and they are imperfectly excludable. We embed these properties in a growth model in which increasing scope requires entrepreneurs to share proprietary knowledge with managers, who can carry it into competing ventures. The resulting hold-up problem limits both firm scope and entry. We first show that better technology allows greater scope, but a larger share of firm value is captured by managers; concentration, valuations, and profit shares all rise, but entry falls---as may long-run growth. These effects reflect a wedge between private and social value. Hence, secondly, taxing intangible investment or strengthening intellectual property protection can raise welfare by broadening firm scope. Moreover, replication creates capital services in ways that are not measured, generating empirical biases in capital input and productivity.