DP14094 A Theory of Falling Growth and Rising Rents

Author(s): Philippe Aghion, Antonin Bergeaud, Timo Boppart, Peter J. Klenow, Huiyu Li
Publication Date: November 2019
Keyword(s): Concentration, labor's income share, Markups, productivity slowdown, rents
JEL(s): O31, O47, O51
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14094

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.