Scalable vs. Productive Technologies

Do larger firms have more productive technologies or are their technologies more scalable, or both? We use administrative data on Canadian and US firms to estimate flexible nonparametric production functions. Our estimation results in a joint distribution of output elasticities of capital, labor, and intermediate inputs---therefore, returns to scale (RTS)---along with total factor productivity (TFP). We find significant heterogeneity in both RTS and TFP across firms. Larger firms operate technologies with higher RTS, both across and within industries. Higher RTS for large firms are entirely driven by higher intermediate input elasticities. Descriptively, these align with higher intermediate input revenue shares. We then incorporate RTS heterogeneity into an otherwise standard incomplete markets model with endogenous entrepreneurship that matches the observed heterogeneity in TFP and RTS. In this model, we find that the efficiency losses of financial frictions are more than twice as large relative to the conventional calibration that loads all heterogeneity on TFP and imposes a common RTS parameter.