Entry vs. Rents: Aggregation with Economies of Scale / David Baqaee, Emmanuel Farhi.

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Baqaee, David

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w27140.Publication details: Cambridge, Mass. National Bureau of Economic Research 2020.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper characterizes the response of aggregate output to micro shocks in dis-aggregated economies with entry, internal or external returns to scale, input-output linkages, and distortions. We decompose changes in output into changes in technical and allocative efficiency, and show that the latter depend on changes in rents and quasi-rents across markets. In addition, we characterize the social costs of distortions. We prove that while first-best industrial policy is network-independent, second-best policy does depend on the network, and boosts upstream industries with high returns to scale. As an example, we quantify the impact of misallocation caused by markups on aggregate efficiency in the US. In our preferred specification, losses are 40% of GDP whereas if we abstract from endogenous entry they are only 20%. Our baseline 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.

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May 2020.

This paper characterizes the response of aggregate output to micro shocks in dis-aggregated economies with entry, internal or external returns to scale, input-output linkages, and distortions. We decompose changes in output into changes in technical and allocative efficiency, and show that the latter depend on changes in rents and quasi-rents across markets. In addition, we characterize the social costs of distortions. We prove that while first-best industrial policy is network-independent, second-best policy does depend on the network, and boosts upstream industries with high returns to scale. As an example, we quantify the impact of misallocation caused by markups on aggregate efficiency in the US. In our preferred specification, losses are 40% of GDP whereas if we abstract from endogenous entry they are only 20%. Our baseline 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.