Working Paper: NBER ID: w25756
Authors: Ufuk Akcigit; Sina T. Ates
Abstract: In the past several decades, the U.S. economy has witnessed a number of striking trends that indicate a rising market concentration and a slowdown in business dynamism. In this paper, we make an attempt to understand potential common forces behind these empirical regularities through the lens of a micro-founded general equilibrium model of endogenous firm dynamics. Importantly, the theoretical model captures the strategic behavior between competing firms, its effect on their innovation decisions, and the resulting “best versus the rest” dynamics. We focus on multiple potential mechanisms that can potentially drive the observed changes and use the calibrated model to assess the relative importance of these channels with particular attention to the implied transitional dynamics. Our results highlight the dominant role of a decline in the intensity of knowledge diffusion from the frontier firms to the laggard ones in explaining the observed shifts. We conclude by presenting new evidence that corroborates a declining knowledge diffusion in the economy. We document a higher concentration of patenting in the hands of firms with the largest stock and a changing nature of patents, especially in the post-2000 period, which suggests a heavy use of intellectual property protection by market leaders to limit the diffusion of knowledge. These findings present a potential avenue for future research on the drivers of declining knowledge diffusion.
Keywords: business dynamism; market concentration; knowledge diffusion; innovation; US economy
JEL Codes: E22; L12; O31; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decline in knowledge diffusion (O39) | decline in business dynamism (L16) |
| decline in knowledge diffusion (O39) | increased market concentration (L11) |
| decline in knowledge diffusion (O39) | higher markups (D49) |
| decline in knowledge diffusion (O39) | discouragement of innovation efforts from follower firms and new entrants (O31) |
| decline in knowledge diffusion (O39) | decline in firm entry rates (L26) |
| decline in knowledge diffusion (O39) | decline in job reallocation (J63) |
| decline in knowledge diffusion (O39) | widening productivity gap between frontier and laggard firms (L25) |
| decline in knowledge diffusion (O39) | decrease in labor share of GDP (E25) |
| decline in knowledge diffusion (O39) | rise in profit share (D33) |
| decline in corporate tax rates (K34) | decline in business dynamism (L16) |
| increase in R&D subsidies (O38) | decline in business dynamism (L16) |
| increase in entry costs (L11) | decline in business dynamism (L16) |