The Adoption of Non-Rival Inputs and Firm Scope

Jiang, Xian; Rubinton, Hannah

doi:10.20955/wp.2024.005

Working Paper Revision

The Adoption of Non-Rival Inputs and Firm Scope

Abstract: Custom software is distinct from other types of capital because it is non-rival—once a firm invests in it, the software can be used simultaneously across its many establishments. Using confidential U.S. Census data, we document that while firms with more establishments are more likely to invest in custom software, they spend less on it as a share of total capital expenditures. We explain these empirical patterns by developing a model that incorporates the non-rivalry of software and the firm’s choice of scope. Firms choose whether to adopt custom software, the intensity of their investment, and their scope, balancing the costs of managing multiple establishments against the increasing returns to scope from non-rival software. Calibrating the model with microdata, we show that improvements in custom software production account for a significant share of rising concentration and aggregate productivity growth. Abstracting from adoption and scope margins substantially understates these effects.

JEL Classification: D24; E22; O33;

https://doi.org/10.20955/wp.2024.005