Entry and Profits in an Aging Economy: The Role of Consumer Inertia

Gideon Bornstein

No 33820, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Over the past four decades, the U.S. economy has seen a decline in the share of young firms alongside a rise in the profit share of GDP. This paper explores how population aging contributes to these twin trends through a demand-side channel. The core hypothesis is that younger households exhibit lower consumer inertia—a tendency to stick with previously chosen products—than older households. As demand shifts toward more inertial consumers, entry becomes harder, incumbents raise markups, and market share tilts toward larger firms. To quantify this mechanism, I develop and calibrate a firm dynamics model with overlapping generations of consumers who differ in their degree of inertia. Using detailed micro data, I show that younger households are significantly less inertial. The model implies that population aging accounts for 20%–30% of the observed decline in young firms and rise in profits. Reduced-form evidence across U.S. states and product categories supports the model’s predictions.

JEL-codes: D40 E20 J10 L10 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-age, nep-dge, nep-lab and nep-mac
Note: EFG
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