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Market Power and the Aggregate Economy

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)

Marriott Marquis, Carlsbad
Hosted By: Econometric Society
  • Chair: Sina Ates, Federal Reserve Board

Quantifying Market Power and Business Dynamism

Jan De Loecker
,
KU Leuven
Jan Eeckhout
,
University College London and University of Barcelona
Simon Mongey
,
University of Chicago

Abstract

We quantify the rise in market power in the aggregate economy and investigate the causes and the consequences. We propose a general equilibrium model with oligopolistic output markets and a competitive labor market, where firm productivity is stochastic, entry is costly and firm size and markups adjust endogenously. Technological change (the variance of productivity shocks and the cost of entry) as well as the market structure (the number of potential entrants) cause a change in the markup distribution especially at the upper percentiles. The model can explain recent secular trends as a consequence of the rise of market power: a decline in labor market dynamism, declining equilibrium wages and labor force participation, and a rise in profitability of large firms. In the calibrated economy, both technological change and a change in market structure are necessary to explain the observed change in markups between 1980 and 2016. We find that 2016 welfare would be 19% higher with 1980 market power.

Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory

Ufuk Akcigit
,
University of Chicago
Sina Ates
,
Federal Reserve Board

Abstract

In 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

Ariel Burstein
,
University of California-Los Angeles
Vasco Carvalho
,
University of Cambridge
Basile Grassi
,
Bocconi University

Abstract

We 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

Pedro Bento
,
Texas A&M University
Diego Restuccia
,
University of Toronto

Abstract

A 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.
JEL Classifications
  • L1 - Market Structure, Firm Strategy, and Market Performance
  • O4 - Economic Growth and Aggregate Productivity