Automation and the Rise of Superstar Firms

Author(s): Hamid Firooz, Zheng Liu, and Yajie Wang

We document evidence that the rise in automation technology contributed to the rise of superstar firms in the past two decades. We explain the empirical link between automation and industry concentration in a general equilibrium framework with heterogeneous firms and variable markups. A firm can operate a labor-only technology or, by paying a per-period fixed cost, an automation technology that uses both workers and robots as inputs. Given the fixed cost, more productive, larger firms are more likely to automate. Increased automation boosts labor productivity, enabling large, robot-using firms to expand further, which raises industry concentration. Our calibrated model does well in matching the highly skewed automation usage toward a few superstar firms observed in the Census data. Since robots substitute for labor, increased automation raises sales concentration more than employment concentration, also consistent with empirical evidence. A modest subsidy for automating firms improves welfare since productivity gains outweigh increased markup distortions.

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Article Citation

Firooz, Hamid, Zheng Liu, and Yajie Wang. 2023. "Automation and the Rise of Superstar Firms," Federal Reserve Bank of San Francisco Working Paper 2022-05. Available at https://doi.org/10.24148/wp2022-05