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Superstar Firms

Paper Session

Tuesday, Jan. 5, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Teresa C. Fort, Dartmouth College

The Darwinian Returns to Scale

David Rezza Baqaee
,
University of California-Los Angeles
Emmanuel Farhi
,
Harvard University

Abstract

How does an increase in the size of the market due to fertility, immigration, or trade integration, affect welfare and real GDP? We study this question using a model with heterogeneous firms, fixed costs, and monopolistic competition. We decompose the change in welfare into changes in technical and allocative efficiency due to reallocation. We non-parametrically identify residual demand curves with firm-level data and, using these estimates, quantify our theoretical results. We find that somewhere
between 70% to 90% of the aggregate returns to scale are due to changes in allocative efficiency. In bigger markets, competition endogenously toughens and triggers Darwinian reallocations: big firms expand, small firms shrink and exit, and new firms
enter. However, important as they are, the
improvements in allocative efficiency are
not driven by oft-emphasized reductions in markups or deaths of unproductive firms. Instead they are caused by a composition effect that reallocates resources from lowmarkup to high-markup firms. Our analysis implies that the aggregate return to scale
is an endogenous outcome shaped by frictions and market structure, and likely varies with time, place, and policy. Furthermore, even mild increasing returns to scale at the micro level can give rise to large increasing returns to scale at the macro level.

Industries and Increasing Inequality

John C. Haltiwanger
,
University of Maryland
Henry Hyatt
,
U.S. Census Bureau
James R. Spletzer
,
U.S. Census Bureau

Abstract

Most of the recent rise in U.S. earnings inequality has occurred at the industry level, and, moreover, due to changes in a relatively small number of industries. About ten percent of the over 300 4-digit NAICS industries account for nearly all of the increase in between-industry inequality. Using an AKM decomposition of earnings, the increase in between-industry inequality can be attributed to changes in worker composition through sorting and segregation. For industries at the top of the earnings distribution, their contribution is dominated by rising inter-industry earnings differentials. Among low-paying industries, expanding employment contributed to increasing inequality.

ICT Investment and Industrial Concentration in a Digital Era: Evidence with Micro Data

Erik Brynjolfsson
,
Massachusetts Institute of Technology and NBER
Wang Jin
,
Massachusetts Institute of Technology
Xiupeng Wang
,
Massachusetts Institute of Technology

Abstract

Recent papers in literature have documented a rising industrial concentration in the US during the past decades. The ever-digitalized firm is suggested as one of the likely potential causes.. However, large-scale empirical evidence is scarce possibly due to data limitation. Using confidential data from the U.S. Census Bureau, we constructed a representative sample across all major sectors at the firm level from 2003-2013 to study how investment in information and communication technology (ICT) contributes to such trend. Combined with the administrative database from the IRS, we are able to measure the industrial concentration through three scopes of firm size: employment, payroll, and total sales. Our results show that investment in ICT is positively and significantly correlated with firm size in all aspects while controlling for other factors and fixed effects. Furthermore, such correlation is more pronounced among large firms suggesting that investment in ICT helps large firms grow even larger and contribute to a more concentrated market in the US. Meanwhile, there is little correlation between ICT and average wage despite increased firm size associated with ICT investment. However, in certain sectors, particularly retail and services, ICT investment is significantly correlated with increased sales per employee.

The Innovation/Complexity Trade-off: How Bottlenecks Create Superstars and Constrain Growth

Seth Gordon Benzell
,
Chapman University and Massachusetts Institute of Technology
Erik Brynjolfsson
,
Massachusetts Institute of Technology and NBER

Abstract

We introduce a model of technological growth as allowing for greater maximum productivity at the cost of increased complexity. Complex goods, like Swiss watches, require a large amount of strongly complementary precision inputs. Increasing complexity skews the distribution of firms sizes, with more extreme superstars and a higher share of mediocre firms. Whether increasing complexity increases growth is determined by the relative growth of maximum productivity and effective complexity as the number of components increases. We evaluate strategies to deal with complexity, including modularization, and show that they are just as important for boosting long term growth as flashier innovations.
Discussant(s)
Christina Patterson
,
Massachusetts Institute of Technology
Caroline Stiel
,
German Institute for Economic Research (DIW Berlin)
Esteban A. Rossi-Hansberg
,
Princeton University
Thomas Philippon
,
New York University
JEL Classifications
  • L0 - General
  • O0 - General