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Information Technology and Returns to Scale

Author

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  • Danial Lashkari
  • Arthur Bauer
  • Jocelyn Boussard

Abstract

This paper investigates the role of IT in shaping recent trends in market concentration, factor income shares, and market competition. Relying on a novel dataset on hardware and software investments in the universe of French firms, we document a robust within-industry correlation between firm size and the intensity of IT demand. To explain this fact, we argue that the relative marginal product of IT inputs may rise with firm scale, since IT specifically helps firms deal with organizational limits to scale. We propose a general equilibrium model of industry dynamics that features firm-level production functions compatible with this mechanism. We estimate the production function and find evidence for the nonhomotheticity of IT demand and for an elasticity of substitution between IT and other inputs that falls below unity. Under the estimated model parameters, the cross-sectional predictions of the model match the observed relationship of firm size with IT intensity (positive) and labor share (negative). In addition, as a response to the fall in the relative price of IT inputs in post-1990 France, the model can explain about half of both the observed rise in market concentration and the observed market reallocation toward low-labor-share-firms.

Suggested Citation

  • Danial Lashkari & Arthur Bauer & Jocelyn Boussard, 2019. "Information Technology and Returns to Scale," Working papers 737, Banque de France.
    • Handle: RePEc:bfr:banfra:737
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    References listed on IDEAS

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    1. Maya Eden & Paul Gaggl, 2018. "On the Welfare Implications of Automation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 15-43, July.
    2. Teresa C. Fort, 2017. "Technology and Production Fragmentation: Domestic versus Foreign Sourcing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 650-687.
    3. Ulrich Doraszelski & Jordi Jaumandreu, 2018. "Measuring the Bias of Technological Change," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 1027-1084.
    4. Teresa C. Fort, 2017. "Technology and Production Fragmentation: Domestic versus Foreign Sourcing," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 650-687.
    5. Michael Elsby & Bart Hobijn & Ayseful Sahin, 2013. "The Decline of the U.S. Labor Share," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(2 (Fall)), pages 1-63.
    6. Acemoglu, Daron & Autor, David, 2011. "Skills, Tasks and Technologies: Implications for Employment and Earnings," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 12, pages 1043-1171, Elsevier.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Philippe Aghion & Antonin Bergeaud & Timo Boppart & Peter J Klenow & Huiyu Li, 2023. "A Theory of Falling Growth and Rising Rents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(6), pages 2675-2702.
    2. repec:spo:wpmain:info:hdl:2441/5j3i17uo7399t940lrt6h6n545 is not listed on IDEAS
    3. repec:hal:wpspec:info:hdl:2441/5j3i17uo7399t940lrt6h6n545 is not listed on IDEAS
    4. Berlingieri, Giuseppe & Blanchenay, Patrick & Criscuolo, Chiara, 2024. "The great divergence(s)," Research Policy, Elsevier, vol. 53(3).
    5. Fabian Eckert & Sharat Ganapati & Conor Walsh, 2020. "Urban-Biased Growth: A Macroeconomic Analysis," CESifo Working Paper Series 8705, CESifo.
    6. Nikolas Zolas & Zachary Kroff & Erik Brynjolfsson & Kristina McElheran & David N. Beede & Cathy Buffington & Nathan Goldschlag & Lucia Foster & Emin Dinlersoz, 2020. "Advanced Technologies Adoption and Use by U.S. Firms: Evidence from the Annual Business Survey," NBER Working Papers 28290, National Bureau of Economic Research, Inc.
    7. repec:hal:spmain:info:hdl:2441/5j3i17uo7399t940lrt6h6n545 is not listed on IDEAS
    8. Gabriel Smagghue, 2021. "Heterogeneous Policy Distortions and the Labor Share," Working papers 803, Banque de France.
    9. Maarten de Ridder, 2022. "Market power and innovation in the intangible economy," POID Working Papers 064, Centre for Economic Performance, LSE.
    10. Ian Goldin & Pantelis Koutroumpis & François Lafond & Julian Winkler, 2024. "Why Is Productivity Slowing Down?," Journal of Economic Literature, American Economic Association, vol. 62(1), pages 196-268, March.
    11. de Ridder, Maarten, 2019. "Market power and innovation in the intangible economy," LSE Research Online Documents on Economics 100946, London School of Economics and Political Science, LSE Library.
    12. Panon, Ludovic, 2022. "Labor share, foreign demand and superstar exporters," Journal of International Economics, Elsevier, vol. 139(C).
    13. Clement E. Bohr & Mart'i Mestieri & Emre Enes Yavuz, 2023. "Aggregation and Closed-Form Results for Nonhomothetic CES Preferences," Papers 2311.06740, arXiv.org.
    14. repec:spo:wpecon:info:hdl:2441/5j3i17uo7399t940lrt6h6n545 is not listed on IDEAS
    15. Erik Brynjolfsson & Wang Jin & Kristina McElheran, 2021. "The power of prediction: predictive analytics, workplace complements, and business performance," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 56(4), pages 217-239, October.
    16. Chen, J. & Elliott, M. & Koh, A., 2020. "Capability Accumulation and Conglomeratization in the Information Age," Cambridge Working Papers in Economics 2069, Faculty of Economics, University of Cambridge.
    17. Paulie, Charlotte, 2021. "Labor-share dynamics -The role of import competition," Working Paper Series 2021:13, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    18. Joachim Hubmer, 2023. "The Race Between Preferences and Technology," Econometrica, Econometric Society, vol. 91(1), pages 227-261, January.
    19. Gabriel Smagghue, 2022. "Heterogeneous Policy Distortions and the Labor Share," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 56-79, January.

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    More about this item

    Keywords

    : Information Technology; Labor Share; Competition; Production Function; Nonhomotheticity.;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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