Working Paper

A Theory of Falling Growth and Rising Rents

Abstract: 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.

JEL Classification: O31; O47; O51;

https://doi.org/10.24148/wp2019-11

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2022-01-21

Number: 2019-11

Note: The first version of this Working Paper was published March 27, 2019

Related Works

• https://www.frbsf.org/economic-research/publications/working-papers/2019/11/