The persistent and informative distribution of returns on capital

Abstract

This Letter draws on series of very large national samples of individual enterprises across fifteen countries to show that cross-sectional distributions of realized returns on capital (RoC) are persistently well described by the same functional form: highly peaked distributions with stretched-exponential tails. The Letter shows how the tails of these distributions can be understood as entropy maxima, suggesting complex patterns of competitive interactions across decentralized, market economies sustain formally persistent statistical equilibria in markets for capital. Such equilibria and their characteristics set the explanatory burden for successful economic accounts of the competitive regulation of profitability. They also point toward interesting new lines of inquiry on the systemic consequences of market competition in those economies and on the price structures it conditions.