A Theory of Falling Growth and Rising Rents
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Implication
Theoretical model reveals declining overhead costs drive market concentration and reduce long-term growth, indicating that efficiency advantages among dominant firms suppress innovation.
Key Points
- Provide a theoretical framework explaining the simultaneous decline in macroeconomic growth, rising firm concentration, and shifting market share toward low-labor-share firms in the United States.
- Constructed an endogenous macroeconomic model incorporating multi-product firm dynamics and variable overhead expansion costs.
- Simulated the competitive effects of declining span-of-control costs and expanding efficiency advantages among market-leading firms.
- Demonstrated that lower overhead costs prompt efficient, high-markup firms to enter new product lines, spurring a transient burst in aggregate growth alongside higher market concentration.
- Showed that intensified competition from dominant multi-product firms ultimately compresses within-firm markups and disincentivizes future innovation, driving long-run growth downward.
Cite This Study
Aghion et al. (2023) studied this question.