The Increasing Presence of Large Firms and the Decline in US Startup Rates

56 Pages Posted: 31 Jul 2019

See all articles by Niklas Garnadt

Niklas Garnadt

University of Mannheim Graduate School of Economic and Social Sciences

Date Written: November 13, 2018

Abstract

While the significant decline in US firm formation rates over the past 30 years has raised concern about the health of the US economy, its causes are not yet fully understood. I argue that a significant part of this decline can be explained as an efficient response to size biased technological change. I document an increase in the size of large firms in the US since the mid-1980s contemporaneous to the decline in firm formation rates and show that large firms expanded by sharply increasing the number of establishments they operate. These changes in the organizational structure of large firms are consistent with improvements in information and communications technology which mainly benefited large firms by reducing monitoring, coordination and distribution costs. I construct a simple industry dynamics model in which an expansion by large firms due to reductions in the cost of managing many establishments crowds out smaller firms that are responsible for most of firm turnover. While generating a decrease in startup rates and an increase in the size of large firms through an increase in the number of establishments they operate, welfare improves. These results counter the popular opinion that declining firm formation rates are necessarily a bad sign.

Keywords: Industry Structure, Firm Size Distribution, Firm Creation, Entrepreneurship, Startup Decline

JEL Classification: E24, L25, L26

Suggested Citation

Garnadt, Niklas, The Increasing Presence of Large Firms and the Decline in US Startup Rates (November 13, 2018). Available at SSRN: https://ssrn.com/abstract=3426347 or http://dx.doi.org/10.2139/ssrn.3426347

Niklas Garnadt (Contact Author)

University of Mannheim Graduate School of Economic and Social Sciences ( email )

Mannheim
Germany

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