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Entry vs. Rents: Aggregation with Economies of Scale

Author

Listed:
  • David Baqaee
  • Emmanuel Farhi
Abstract
We characterize the response of aggregate output to micro shocks in disaggregated economies with entry, non-constant returns to scale, input-output linkages, and distortions. We decompose output changes into technical and allocative efficiency components, and show that the latter depends on changes in rents and quasi-rents across markets. We use this to characterize the social costs of distortions and show the importance of accounting for entry both qualitatively and quantitatively. As an example, we show that the efficiency losses caused by markups in the US rise from around 20% of GDP to around 40% once we account for the entry margin. Our base-line is sensitive not only to the presence of entry, but also to the specifics of how entry is modeled, in ways that our social-costs-of-distortions formulas clarify. Entry can substantively alter the economy’s response to shocks even if variable profits and fixed costs are small as a share of GDP.

Suggested Citation

  • David Baqaee & Emmanuel Farhi, 2020. "Entry vs. Rents: Aggregation with Economies of Scale," NBER Working Papers 27140, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27140
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O21 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Planning Models; Planning Policy
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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