Friday, September 20, 2019
Niklas Garnadt, University of Mannheim Graduate School of Economic and Social Sciences identifies The Increasing Presence of Large Firms and the Decline in US Startup Rates.
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.