Sweat Equity in U.S. Private Business

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Sweat Equity in
U.S. Private Business

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The Region

In a recent working paper published by the Federal Reserve Bank of Minneapolis, Anmol Bhandari and Ellen McGrattan develop a theory to measure sweat equity in private businesses and analyze the effects of tax reform on both privately-held and publicly-traded businesses.

Sweat equity is the value of intangible assets such as client lists and customer bases that stakeholders work to develop in a company. Since business valuations depend significantly on this unmeasured time and work - sweat - that is devoted to building sweat equity, little is truly known about private businesses. Bhandari and McGrattan’s theory treats sweat as a form of capital and an input of production, just like land, equipment, hours, and other measurable factors.

A byproduct of the traditional mismeasurement of sweat equity is under-informed tax policy. When Bhandari and McGrattan account for sweat capital in their model, they are able to better estimate the effects of tax policy changes.

Anmol Bhandari is an Assistant Professor in the Department of Economics at the University of Minnesota

Ellen McGrattan is the director of the Heller-Hurwicz Economics Institute and a Professor in the Department of Economics at the University of Minnesota

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