Working Papers

2019-11 | January 2022

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A Theory of Falling Growth and Rising Rents

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Growth has fallen in the U.S. amid a rise in firm concentration. Market share has shifted to low labor share firms, while within-firm labor shares have actually risen. We propose a theory linking these trends in which the driving force is falling overhead costs of spanning multiple products or a rising efficiency advantage of large firms. In response, the most efficient firms (with higher markups) spread into new product lines, thereby increasing concentration and generating a temporary burst of growth. Eventually, due to greater competition from efficient firms, within-firm markups and incentives to innovate fall. Thus our simple model can generate qualitative patterns in line with the observed trends.

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Article Citation

Aghion, Philippe, Antonin Bergeaud, Timo Boppart, Peter J. Klenow, and Huiyu Li. 2019. "A Theory of Falling Growth and Rising Rents," Federal Reserve Bank of San Francisco Working Paper 2019-11. Available at https://doi.org/10.24148/wp2019-11