A Theory of Falling Growth and Rising Rents

Philippe Aghion, College de France, INSEAD and London School of Economics, Antonin Bergeaud, HEC Paris, CEP-LSE and CEPR, Timo Boppart, IIES, Stockholm University and University of St. Gallen, Peter J. Klenow, Stanford University, and Huiyu Li, Federal Reserve Bank of San Francisco

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.