Scale Economies and Aggregate Productivity

Joel Kariel and Anthony Savagar

Papers from arXiv.org

Abstract: We develop a theoretical framework to investigate the link between rising scale economies and stagnating productivity. Our model features heterogeneous firms, imperfect competition, and firm selection. We demonstrate that scale economies generated by fixed costs have distinct impacts on aggregate productivity compared to those driven by returns to scale. Using UK data, we estimate long-run increases in both fixed costs and returns to scale. Our model implies that this should increase aggregate productivity through improved firm selection and resource allocation. However, increasing markups can offset the productivity gain. Higher markups cushion low-productivity firms' revenues, allowing them to survive, and constrain firm output, which limits exploitation of scale economies.

Date: 2024-11
New Economics Papers: this item is included in nep-com and nep-eff
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