“Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory”, 2021 (; similar):
In this paper, we review the literature on declining business dynamism and its implications in the United States and propose an unifying theory to analyze the symptoms and the potential causes of this decline.
We first highlight 10 pronounced stylized facts related to declining business dynamism documented in the literature and discuss some of the existing attempts to explain them:
- Market concentration has increased.
- Markups have increased.
Profit share of GDP has increased.
The labor share of output has declined.
Market concentration and labor share are negatively associated.
Labor productivity gap between frontier and laggard firms has widened.
Firm entry rate and the share of young firms in economic activity have declined.
Job reallocation and churn have slowed.
The dispersion of firm growth rates has gone down.
- Productivity growth has fallen.
We then describe a theoretical framework of endogenous markups, innovation, and competition that can potentially speak to all of these facts jointly. We next explore some theoretical predictions of this framework, which are shaped by two interacting forces: a composition effect that determines the market concentration and an incentive effect that determines how firms respond to a given concentration in the economy. The results highlight that a decline in knowledge diffusion between frontier and laggard firms could be an important driver of empirical trends observed in the data.
This study emphasizes the potential of growth theory for the analysis of factors behind declining business dynamism and the need for further investigation in this direction.