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This paper argues that a unified analysis of consumption and production is required to understand the long‐run behavior of the U.S. labor share. First, using household data on the universe of consumer spending, I document that higher‐income households spend relatively more on labor‐intensive goods and services as a share of their total consumption. Interpreted as nonhomothetic preferences, this fact implies that economic growth increases the aggregate labor share through an income effect. Second, using disaggregated data on factor shares and capital intensities, I document that equipment‐intensive goods experienced relatively larger declines in their labor shares. Based on this finding, I estimate that capital and labor are gross substitutes, and that investment‐specific technical change reduces the labor share. Given the estimated elasticities, a parsimonious neoclassical model quantitatively matches the observed low‐frequency movements in the aggregate labor share since the 1950s, both its relative stability until about 1980 and its decline thereafter. [ABSTRACT FROM AUTHOR]

Dynamic (or stochastic) games are, in general, considerably more complicated to analyze than repeated games. This paper shows that for every deterministic dynamic game that is linear in the state, there exists a strategically equivalent representation as a repeated game. A dynamic game is said to be linear in the state if it holds for both the state transition function as well as for the one-period payoff function that (i) they are additively separable in action profiles and states and (ii) the state variables enter linearly. Strategic equivalence refers to the observation that the two sets of subgame perfect equilibria coincide, up to a natural projection of dynamic game strategy profiles on the much smaller set of repeated game histories. Furthermore, it is shown that the strategic equivalence result still holds for certain stochastic elements in the transition function if one allows for additional signals in the repeated game or in the presence of a public correlating device. [ABSTRACT FROM AUTHOR]