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Customer Capital

Author

Listed:
  • Leena Rudanko

    (Boston University)

  • Francois Gourio

    (Boston University)

Abstract

Firms spend significant resources on creating and maintaining long-term customer relationships. We explore the role of this customer capital - a form of intangible capital - for firm valuation and physical investment. We build a general equilibrium model of long-term customer relationships, where existing customers are partially locked-in due to frictional product markets, and firms advertise, competing for customers by offering discounts. Calibrating the model, we find that it reproduces the low correlation of investment with Tobin’s Q, and the high correlation of investment with cash flows found in data. Consistent with our model, we find that in the data investment is more correlated with cash flows, and less with Q, in industries where customer capital (as proxied by advertising expenses) is more important.

Suggested Citation

  • Leena Rudanko & Francois Gourio, 2010. "Customer Capital," 2010 Meeting Papers 121, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:121
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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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