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Wasted Ideas: Limited Diversification and the Rise of Intangibles 

Job Market Paper* 

Abstract

I study entrepreneurial investment decisions when productive intangible capital is increasingly important, but remains risky and difficult to pledge. I find poor undiversified entrepreneurs overwhelmingly use tangible capital than their diversified benchmarks. This novel composition distortion arises because tangible capital provides a productive hedge. It preserves its value in the bad states, in addition to being productive and serving as collateral. Wealthier owners increasingly self-insure with cash, but exposure to risk keeps their investment tilted toward tangibles even after financial constraints relax. Quantitatively, limited diversification reduces aggregate intangible capital by 9% and output by 4% relative to full diversification in the baseline. These shortfalls increase as production becomes more intensive in intangible inputs.

* (draft available upon request)