Scale Economies and Aggregate Productivity

TL;DR

This paper presents a theoretical model linking scale economies, firm heterogeneity, and productivity, showing how fixed costs and markups influence aggregate productivity through firm selection and resource allocation.

Contribution

It introduces a framework distinguishing effects of fixed costs and returns to scale on productivity, incorporating firm heterogeneity and imperfect competition.

Findings

Scale economies from fixed costs can boost productivity.

Higher markups can offset productivity gains by supporting low-productivity firms.

Empirical estimates show increases in fixed costs and returns to scale in the UK.

Abstract

We develop a theoretical framework to investigate the link between rising scale economies and stagnating productivity. Our model features heterogeneous firms, imperfect competition, and firm selection. We demonstrate that scale economies generated by fixed costs have distinct impacts on aggregate productivity compared to those driven by returns to scale (slope of marginal cost). Using UK data, we estimate long-run increases in both fixed costs and returns to scale. Our model implies that this should increase aggregate productivity through improved firm selection and resource allocation. However, increasing markups can offset the productivity gain. Higher markups cushion low-productivity firms' revenues, allowing them to survive, and constrain firm output, which limits exploitation of scale economies.