Population Growth and Firm Dynamics

Working Paper: NBER ID: w29424

Authors: Michael Peters; Conor Walsh

Abstract: Population growth has declined markedly in almost all major economies since the 1970s. We argue this trend has important consequences for the process of firm dynamics and aggregate growth. We study a rich semi-endogenous growth model of firm dynamics, and show analytically that a decline in population growth reduces creative destruction, increases average firm size and concentration, raises market power and misallocation, and lowers aggregate growth in the long-run. We also show lower population growth has positive effects on the level of productivity, making the short-run welfare impacts ambiguous. In a quantitative application to the U.S, we find that the slowdown in population growth since the 1980s and the projected continuation of this trend accounts for a substantial share of the fall in the entry and exit rates and the increase in firm size. By contrast, the impact on markups is modest. The effect on aggregate growth is positive for around two decades, before turning negative thereafter.

Keywords: No keywords provided

JEL Codes: J11; L11; O3; O4

Causal Claims

Cause	Effect
Decline in population growth (J11)	Reduced creative destruction (O39)
Reduced creative destruction (O39)	Decreased innovation (O39)
Decreased innovation (O39)	Increased average firm size (L25)
Decreased innovation (O39)	Increased market concentration (D49)
Increased average firm size (L25)	Increased market power (D43)
Increased market power (D43)	Lower aggregate growth (O40)
Decline in population growth (J11)	Increased average firm size (L25)
Decline in population growth (J11)	Increased market concentration (D49)
Decline in population growth (J11)	Lower aggregate growth (O40)
Decline in population growth (J11)	Reduced firm entry rates (L26)
Decline in population growth (J11)	Reduced firm exit rates (L26)