and especially for OECD countries, intangible capital is the largest constituent of total wealth. For the whole sample, it represents on average more than 60 percent of total wealth.

Our measure of intangible capital therefore captures a broad range of assets – not only human capital, but also social/institutional and other forms of capital. Intuitively, we would expect intangible capital to be related to total factor productivity (TFP), and part of the analysis in this paper is concerned with verifying this intuition. Using a development accounting framework, we applied variance decomposition techniques to measure the extent to which factors of production explain the variation in output per worker. When the factors of production are physical capital, natural capital, and (physical) human capital per worker, they explain only between 20 and 43 percent of the total variation in output per worker in our sample – the balance of the variation is assumed to be explained by TFP. When the factors of production are physical capital, natural capital, and the intangible capital residual (instead of human capital), the variation in factors of production explains 97 percent of the total variation in output per worker – the balance of the variation explained by TFP must therefore be extremely small.

There is strong evidence, therefore, for a link between the non-human capital portion of intangible capital and TFP. This is important given the emphasis given to TFP growth, versus increases in factor inputs, in the growth literature. Ultimately, growth in factor inputs will be subject to diminishing returns. But this can be overcome through growth in TFP, which economists have generally equated with knowledge – more efficient technologies, more effective management, and increased quality of institutions. Our analysis suggests that wealth accounting can begin to put an asset value on this knowledge.

To better understand the role played by intangible capital in production, we also estimated a Cobb-Douglas production function where produced, natural and intangible capital are the factors of production. Using fixed effects estimation for all countries in our sample (115 countries over the years 1995, 2000 and 2005), we find that the shares of produced, natural and intangible capital in production are 32%, 7% and 18% respectively; if we limit our sample to developing countries the shares are quite similar. However, when we limit the sample to OECD countries, we find the striking result that the only statistically significant factor of production is intangible capital, with a 50% share. This finding supports the conjecture in Ferreira and Vincent (2005) that intangible factors, rather than produced or natural capital, are the principal sources of consumption growth in high-income countries.

We also attempted to decompose the constituents of intangible capital using data on institutional quality (as measured by a rule of law index) and human capital. Panel regression analysis suggests that the contribution of human capital is indeed important. A one-point increase in our human capital indicator is associated with an increase in intangible wealth of over $92,000 for the average country in our sample. This implies a difference in intangible capital of over 17