Scalable versus Productive Technologies

RePEc Short ID: pho827
ORCID iD: 0009-0003-1725-6205

Chan, Mons; Hong, Guangbin; Hubmer, Joachim; Ozkan, Serdar; Salgado, Sergio

doi:10.20955/wp.2024.019

Working Paper Revision

Scalable versus Productive Technologies

Abstract: CORRECT ORDER OF AUTHORS: Hubmer, Chan, Ozkan, Salgado, Hong. Do larger firms have more productive technologies, are their technologies more scalable, or both? We use administrative data on Canadian and US firms to estimate a joint distribution of output elasticities of capital, labor, and intermediate inputs—thus, returns to scale (RTS)—along with total factor productivity (TFP). We find significant heterogeneity in RTS across firms within industries. Furthermore, larger firms operate technologies with higher RTS, whereas the largest firms do not exhibit the highest TFP. Higher RTS for large firms are entirely driven by higher intermediate input elasticities. Descriptively, these align with higher intermediate input revenue shares. We also show that high-RTS firms grow faster, pay higher wages, and are owned by wealthier households. We then incorporate RTS heterogeneity into the workhorse model of endogenous entrepreneurship that matches the observed heterogeneity in TFP and RTS. We find that the efficiency losses from financial frictions are more than twice as large compared to a conventional calibration that attributes all heterogeneity to TFP and assumes a common RTS parameter.

Keywords: production function heterogeneity; returns to scale; misallocation;

JEL Classification: E22; L11; L25;

https://doi.org/10.20955/wp.2024.019