Working Paper: CEPR ID: DP14094
Authors: Philippe Aghion; Antonin Bergeaud; Timo Boppart; Peter J. Klenow; Huiyu Li
Abstract: Growth has fallen in the U.S., while firm concentration and profits have risen. Meanwhile, labor's share of national income is down, mostly due to the rising market share of low labor share firms. We propose a theory for these trends in which the driving force is falling firm-level costs of spanning multiple markets, perhaps due to accelerating IT advances. In response, the most efficient firms (with higher markups) spread into new markets, thereby generating a temporary burst of growth. Because their efficiency is difficult to imitate, less efficient firms find markets more difficult to enter profitably and therefore innovate less. Eventually, due to greater competition from efficient firms, within-firm markups actually fall. Despite the increase in the aggregate markup and rents, firm incentives to innovate decline --- lowering the long run growth rate.
Keywords: productivity slowdown; labor's income share; concentration; markups; rents
JEL Codes: O31; O47; O51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| falling firm-level costs of spanning multiple markets (F12) | initial burst of growth (O41) |
| initial burst of growth (O41) | temporary increase in aggregate productivity growth (O49) |
| temporary increase in aggregate productivity growth (O49) | reduced innovation incentives (O39) |
| falling firm-level costs of spanning multiple markets (F12) | market expansion by high-efficiency firms (L25) |
| market expansion by high-efficiency firms (L25) | greater competition among firms (L19) |
| greater competition among firms (L19) | reduced within-firm markups (L11) |
| greater competition among firms (L19) | lower long-run growth rate (O49) |
| falling firm-level costs of spanning multiple markets (F12) | lower long-run growth rate (O49) |