Let’s assume that I have a general equilibrium model in which households provide labor as well as capital to firms. They are compensated in form of wage and remuneration of capital payments from firms.
I take the famous Calvo setting: firms are divided into final firms (they aggregate different intermediate goods and sell the aggregate to households) and intermediate firms (production of intermediate goods according to a standard production function and input factors provided by households). By definition, intermediate firms act under monopolistic competition because each of them produces a differentiated good. Therefore, intermediate firms make profit.
I wonder how to measure return on capital from households’ perspective.
When I do exactly the same like Boldrin, Christiano, and Fisher (1999) (they derive the return on equity from the value of a capital unit in combination with remuneration of capital), I get in combination with habit persistence preferences a substantial equity premium, like Jermann who does not use the remuneration of capital at all: instead, he uses dividend payments to households.
When I use Boldrin, Christiano, and Fisher’s approach, I do not use dividend payments (I think they indeed exist in terms of monopolistic competition on the intermediate goods market). When I include the dividend payments in combination with remuneration of capital, the equity premium explodes.
My main question is how to deal with gains from intermediate firms when I want to evaluate return on equity in my setting. So far, i assumed that gains from intermediate firms vanish in the process of aggregation in terms of price dispersion, but Im not sure…