January 12, 2022, 14:00–15:30
Job Market Seminar
This paper studies the macroeconomic implications of the rise in firm-level scale economies. My empirical finding is that the average firm-level returns to scale increased within all US sectors, going from 1 to 1.05 between 1980 and 2014. Simultaneously, business dynamism declined, markups rose, and firms devoted increasing resources to customer acquisition, suggesting their active involvement in building and exploiting scales. To jointly account for these facts, I propose a novel theory of firm dynamics grounded in directed search in the product market. Search frictions microfound the customer accumulation process and the presence of heterogeneous markups. The rise in returns to scale explains 62-70% of the decline in business dynamism; 29% of the increase in markups; and 14-45% of the growth in expenditures devoted to customers acquisition. Additionally, the model rationalizes further facts: the aging of US firms, the reallocation of sales toward high markup firms, and firms’ declining responsiveness to productivity shocks.