Capital Share Dynamics When Firms Insure Workers

Although the aggregate capital share of U.S. firms has increased, capital share at the firm-level has decreased. This divergence is due to mega-firms that produce a larger output share without a proportionate increase in labor compensation. We develop a model in which firms insure workers against firm-specific shocks, with more productive firms allocating more rents to shareholders, while less productive firms endogenously exit. Increasing firm-level risk delays exit and increases the measure of mega-firms, raising (lowering) the aggregate (average) capital share. An increase in the level of rents magnifies this effect. We present evidence that supports this mechanism.