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Endogenous Returns to Scale

Author

Listed:
  • Kopytov, Alexandr
  • Taschereau-Dumouchel, Mathieu
  • Xu, Zebang

Abstract

We develop a general equilibrium model in which firms choose how scalable their production technologies are. More scalable technologies make it easier for firms to expand output but are less effective at small scale. In equilibrium, more productive firms adopt more scalable technologies and grow disproportionately large. As a result, the tail of the size distribution becomes thicker and, as resources reallocate to the most productive producers, GDP increases. Over the long-run, as aggregate productivity rises, firms adopt more scalable technologies, which lowers input prices, leading to further increases in scalability. Through this supply-chain amplification process, endogenous returns to scale raise the growth rate of GDP. A calibrated version of the model shows that these effects are quantitatively significant. We also document support for the model's predictions in firm-level data.

Suggested Citation

  • Kopytov, Alexandr & Taschereau-Dumouchel, Mathieu & Xu, Zebang, 2026. "Endogenous Returns to Scale," EconStor Preprints 341038, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:341038
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    References listed on IDEAS

    as
    1. Star, Spencer & Hall, Robert E, 1976. "An Approximate Divisia Index of Total Factor Productivity," Econometrica, Econometric Society, vol. 44(2), pages 257-263, March.
    2. Xavier Gabaix & Rustam Ibragimov, 2011. "Rank - 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(1), pages 24-39, January.
    3. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    4. Gabaix, Xavier & Ibragimov, Rustam, 2011. "Rank − 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 24-39.
    5. McAdam, Peter & Meinen, Philipp & Papageorgiou, Chris & Schulte, Patrick, 2024. "Returns to scale: New evidence from administrative firm-level data," Discussion Papers 24/2024, Deutsche Bundesbank.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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