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Information Technology and Returns to Scale

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  • Danial Lashkari

    (Boston College)

  • Arthur Bauer

    (ENSAE-CREST)

  • Jocelyn Boussard

    (Banque de France)

Abstract

This paper investigates the role of IT in shaping recent trends in market concentration, factor income shares, and market competition. Relying on a novel dataset on hardware and software investments in the universe of French firms, we document a robust within-industry correlation between firm size and the intensity of IT demand. To explain this fact, we argue that the relative marginal product of IT inputs may rise with firm scale, since IT specifically helps firms deal with organizational limits to scale. We propose a general equilibrium model of industry dynamics that features firm-level production functions compatible with this mechanism. We estimate the production function and find evidence for the nonhomotheticity of IT demand and for an elasticity of substitution between IT and other inputs that falls below unity. Under the estimated model parameters, the cross-sectional predictions of the model match the observed relationship of firm size with IT intensity (positive) and labor share (negative). In addition, as a response to the fall in the relative price of IT inputs in post-1990 France, the model can explain about half of both the observed rise in market concentration and the observed market reallocations toward low-labor-share firms.

Suggested Citation

  • Danial Lashkari & Arthur Bauer & Jocelyn Boussard, 2019. "Information Technology and Returns to Scale," Boston College Working Papers in Economics 984, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:984
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    References listed on IDEAS

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    1. Maya Eden & Paul Gaggl, 2018. "On the Welfare Implications of Automation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 15-43, July.
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    3. Ulrich Doraszelski & Jordi Jaumandreu, 2018. "Measuring the Bias of Technological Change," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 1027-1084.
    4. Teresa C. Fort, 2017. "Technology and Production Fragmentation: Domestic versus Foreign Sourcing," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 650-687.
    5. Michael Elsby & Bart Hobijn & Ayseful Sahin, 2013. "The Decline of the U.S. Labor Share," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(2 (Fall)), pages 1-63.
    6. Acemoglu, Daron & Autor, David, 2011. "Skills, Tasks and Technologies: Implications for Employment and Earnings," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 12, pages 1043-1171, Elsevier.
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    Citations

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    Cited by:

    1. Goldin, Ian & Koutroumpis, Pantelis & Lafond, François & Winkler, Julian, 2020. "Why is productivity slowing down?," MPRA Paper 99172, University Library of Munich, Germany.
    2. de Ridder, Maarten, 2019. "Market power and innovation in the intangible economy," LSE Research Online Documents on Economics 100946, London School of Economics and Political Science, LSE Library.
    3. Erik Brynjolfsson & Wang Jin & Kristina McElheran, 2021. "The power of prediction: predictive analytics, workplace complements, and business performance," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 56(4), pages 217-239, October.
    4. Nikolas Zolas & Zachary Kroff & Erik Brynjolfsson & Kristina McElheran & David N. Beede & Cathy Buffington & Nathan Goldschlag & Lucia Foster & Emin Dinlersoz, 2020. "Advanced Technologies Adoption and Use by U.S. Firms: Evidence from the Annual Business Survey," NBER Working Papers 28290, National Bureau of Economic Research, Inc.
    5. Gabriel Smagghue, 2021. "Heterogeneous Policy Distortions and the Labor Share," Working papers 803, Banque de France.
    6. Paulie, Charlotte, 2021. "Labor-share dynamics -The role of import competition," Working Paper Series 2021:13, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    7. Philippe Aghion & Antonin Bergeaud & Huiyu Li & Peter Klenow & Timo Boppart, 2019. "A Theory of Falling Growth and Rising Rents," 2019 Meeting Papers 458, Society for Economic Dynamics.
    8. Gabriel Smagghue, 2022. "Heterogeneous Policy Distortions and the Labor Share," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 56-79, January.
    9. Ludovic Panon, 2020. "Labor Share, Foreign Demand and Superstar Exporters," Sciences Po publications 2020-12, Sciences Po.
    10. Chen, J. & Elliott, M. & Koh, A., 2020. "Capability Accumulation and Conglomeratization in the Information Age," Cambridge Working Papers in Economics 2069, Faculty of Economics, University of Cambridge.
    11. Fabian Eckert & Sharat Ganapati & Conor Walsh, 2020. "Skilled Scalable Services: The New Urban Bias in Economic Growth," CESifo Working Paper Series 8705, CESifo.

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    More about this item

    Keywords

    Information Technology; Labor Share; Industry Concentration; Production Function Estimation; Nonhomotheticity; Firm Heterogeneity;
    All these keywords.

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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