Among U.S. publicly traded firms, the average firm's capital share has declined, even though the aggregate capital share has increased. We attribute the secular increase in the aggregate capital share among these firms to an increase in firm size inequality that is only partially mitigated by an increase in inter-firm labor compensation inequality. We develop a model in which firms optimally provide managers with insurance against firm-specific shocks. Consequently, larger, more productive firms return a larger share of rents to shareholders, while less productive firms endogenously exit. An increase in firm-level risk lowers the threshold at which firms exit and increases the measure of firms in the right tail of the size distribution. As a result, such an increase always increases the aggregate capital share in the economy, but may lower the average firm's capital share.
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