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Title: A Theory of Falling Growth and Rising Rents

Author(s): Philippe Aghion, Antonin Bergeaud, Timo Boppart, Peter J. Klenow and Huiyu Li

Publication Date: November 2019

Keyword(s): Concentration, labor's income share, Markups, productivity slowdown and rents

Programme Area(s): Macroeconomics and Growth

Abstract: Growth has fallen in the U.S., while firm concentration and profits have risen. Meanwhile, labor's share of national income is down, mostly due to the rising market share of low labor share firms. We propose a theory for these trends in which the driving force is falling firm-level costs of spanning multiple markets, perhaps due to accelerating IT advances. In response, the most efficient firms (with higher markups) spread into new markets, thereby generating a temporary burst of growth. Because their efficiency is difficult to imitate, less efficient firms find markets more difficult to enter profitably and therefore innovate less. Eventually, due to greater competition from efficient firms, within-firm markups actually fall. Despite the increase in the aggregate markup and rents, firm incentives to innovate decline --- lowering the long run growth rate.

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Bibliographic Reference

Aghion, P, Bergeaud, A, Boppart, T, Klenow, P and Li, H. 2019. 'A Theory of Falling Growth and Rising Rents'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14094