The Darwinian Returns to Scale.
How does an increase in market size, say due to globalization, affect welfare? We study this question using a model with monopolistic competition, heterogeneous markups, and fixed costs. We characterize changes in welfare and decompose changes in allocative efficiency into three different effects: (...
| Published in: | Review of Economic Studies Vol. 91; no. 3; pp. 1373 - 1406 |
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| Main Authors: | , , |
| Format: | Article |
| Published: |
Oxford University Press / USA
May2024
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| Subjects: | |
| Online Access: | View this record in EBSCOhost |
| fields | @attributes: recordID: 1 pdfLink: plink: https://search.ebscohost.com/login.aspx?direct=true&db=ssf&AN=177167742&site=ehost-live header: @attributes: shortDbName: ssf uiTerm: 177167742 longDbName: Social Sciences Full Text (H.W. Wilson) uiTag: AN controlInfo: bkinfo: jinfo: jid: 00346527 REM jtl: Review of Economic Studies issn: 00346527 maglogo: N pubinfo: dt: May2024 vid: 91 iid: 3 pid: 622 pub: Oxford University Press / USA artinfo: ui: 177167742 10.1093/restud/rdad061 ppf: 1373 ppct: 33 formats: tig: atl: The Darwinian Returns to Scale. aug: au: Baqaee, David Rezza Farhi, Emmanuel Sangani, Kunal affil: UCLA Harvard su: Elasticity (Economics) Subsidies Returns to scale Economies of scale Overhead costs Demand function sug: subj: Elasticity (Economics) Subsidies Returns to scale Economies of scale Overhead costs Demand function keyword: Efficiency Market size Efficiency Market size ab: How does an increase in market size, say due to globalization, affect welfare? We study this question using a model with monopolistic competition, heterogeneous markups, and fixed costs. We characterize changes in welfare and decompose changes in allocative efficiency into three different effects: (1) reallocations across firms with heterogeneous price elasticities due to intensifying competition, (2) reallocations due to the exit of marginally profitable firms, and (3) reallocations due to changes in firms' markups. Whereas the second and third effects have ambiguous implications for welfare, the first effect, which we call the Darwinian effect, always increases welfare regardless of the shape of demand curves. We nonparametrically calibrate demand curves with data from Belgian manufacturing firms and quantify our results. We find that mild increasing returns at the microlevel can catalyze large increasing returns at the macrolevel. Between 70 and 90% of increasing returns to scale come from improvements in how a larger market allocates resources. The lion's share of these gains are due to the Darwinian effect, which increases the aggregate markup and concentrates sales and employment in high-markup firms. This has implications for policy: an entry subsidy, which harnesses Darwinian reallocations, can improve welfare even when there is more entry than in the first best. pubtype: Academic Journal doctype: Article src: R language: English refInfo: copyright: @attributes: flag: N holdings: @attributes: islocal: N |
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