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A Theory of Falling Growth and Rising Rents

Author

Listed:
  • Philippe Aghion
  • Antonin Bergeaud
  • Timo Boppart
  • Peter J. Klenow
  • Huiyu Li

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.

Suggested Citation

  • Philippe Aghion & Antonin Bergeaud & Timo Boppart & Peter J. Klenow & Huiyu Li, 2019. "A Theory of Falling Growth and Rising Rents," NBER Working Papers 26448, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26448
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    References listed on IDEAS

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    1. Daniel Garcia‐Macia & Chang‐Tai Hsieh & Peter J. Klenow, 2019. "How Destructive Is Innovation?," Econometrica, Econometric Society, vol. 87(5), pages 1507-1541, September.
    2. Gauti B. Eggertsson & Neil R. Mehrotra & Sanjay R. Singh & Lawrence H. Summers, 2016. "A Contagious Malady? Open Economy Dimensions of Secular Stagnation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 581-634, November.
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    7. Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2018. "Resurrecting the Role of the Product Market Wedge in Recessions," American Economic Review, American Economic Association, vol. 108(4-5), pages 1118-1146, April.
    8. Kevin Rinz, 2018. "Labor Market Concentration, Earnings Inequality, and Earnings Mobility," CARRA Working Papers 2018-10, Center for Economic Studies, U.S. Census Bureau.
    9. Rossi-Hansberg, Esteban & Sarte, Pierre-Daniel G. & Trachter, Nicholas, 2018. "Diverging Trends in National and Local Concentration," Working Paper 18-15, Federal Reserve Bank of Richmond.
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    Cited by:

    1. De Ridder, M., 2019. "Market Power and Innovation in the Intangible Economy," Cambridge Working Papers in Economics 1931, Faculty of Economics, University of Cambridge.
    2. Richiardi, Matteo G. & Valenzuela, Luis, 2019. "Firm Heterogeneity and the Aggregate Labour Share," MPRA Paper 94561, University Library of Munich, Germany.
    3. Pedro Bento & Diego Restuccia, 2019. "The Role of Nonemployers in Business Dynamism and Aggregate Productivity," NBER Working Papers 25998, National Bureau of Economic Research, Inc.
    4. Hippolyte d'Albis & Ekrame Boubtane & Dramane Coulibaly, 2019. "Demographic Changes and the Labor Income Share," PSE Working Papers halshs-02278765, HAL.
    5. Gilbert Cette & Lorraine Koehl & Thomas Philippon, 2019. "Labor Shares in Some Advanced Economies," NBER Working Papers 26136, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada

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