Market Power and the Aggregate Economy
Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Sina Ates, Federal Reserve Board
Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory
AbstractIn this paper, we review the literature on declining business dynamism and its implications in the United States and propose a unifying theory to analyze the symptoms and the potential causes of this decline. We first highlight 10 pronounced stylized facts related to declining business dynamism documented in the literature and discuss some of the existing attempts to explain them. We then describe a theoretical framework of endogenous markups, innovation, and competition that can potentially speak to all of these facts jointly. We next explore some theoretical predictions of this framework, which are shaped by two interacting forces: a composition effect that determines the market concentration and an incentive effect that determines how firms respond to a given concentration in the economy. The results highlight that a decline in knowledge diffusion between frontier and laggard firms could be a significant driver of empirical trends observed in the data. This study emphasizes the potential of growth theory for the analysis of factors behind declining business dynamism and the need for further investigation in this direction.
Bottom-up Markup Fluctuations
AbstractWe study markup cyclicality in a macroeconomic model with oligopolistic competition and granular shocks. In our model, shocks to individual firms result in changes in market shares and markups of individual firms. Aggregating up these firm-level outcomes, the model generates fluctuations in sectoral and in economy-wide markups. We assess the model's ability to reproduce salient features of the cyclical properties of markups in French firm level data, from the bottom (firm) level to the aggregate level.
The Role of Nonemployers in Business Dynamism and Aggregate Productivity
AbstractA well-documented observation in the U.S. economy in the last few decades has been the steady decline in the net entry rate of employer firms, a decline in business dynamism, suggesting a possible connection with the recent slowdown in aggregate productivity growth. We consider the role of nonemployers, businesses without paid employees, in business dynamism and aggregate productivity. Notwithstanding the decline in the growth of employer firms, we show that the total number of firms, which includes nonemployer businesses, has increased in the U.S. economy since the early 1980s. We interpret this trend, along with the evolution of the employment distribution across firms, through the lens of a standard theory of firm dynamics. The model implies that firm dynamics have contributed to an average annual growth rate of aggregate productivity of at least 0.26% since the early 1980s, over one quarter of the productivity growth of 1% in the data. Further, our implied measure of productivity growth moves closely over time with measured productivity growth in the data.
- L1 - Market Structure, Firm Strategy, and Market Performance
- O4 - Economic Growth and Aggregate Productivity