Information Technology and Returns to Scale
61 Pages Posted: 26 Sep 2019 Last revised: 3 May 2021
Date Written: May 17, 2018
Disciplined by detailed firm-level data from France, we study the response of the macroeconomy to the dramatic fall observed in IT prices from 1990 to 2007. Our model of industry dynamics with heterogeneous firms accounts for the novel fact that demand for hardware and software, when compared to other inputs, is more elastic in firm size. We show that this nonhomotheticity has important consequences for firm-level returns to scale and for the aggregate response. In our calibration, falling IT prices quantitatively explain around half of the changes in concentration and in the composition of aggregate labor share in France.
Keywords: Information Technology, Labor Share, Industry Concentration, Production Functions, Nonhomotheticity, Firm Heterogeneity
JEL Classification: O3, O4, E2
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