Markups, Firm Scale, and Distorted Economic Growth

We study the consequences of markups for long-run economic growth in a model of firm-driven endogenous technological change. In this framework, differentiated firms engage in monopolistic competition, charge heterogeneous markups, and make forward-looking investments in R&D to improve their process efficiency. Markups distort the scale at which these firms operate and, therefore, affect their incentives to invest in R&D. With dispersion in markups, both the aggregate and cross-firm allocations of such investments are distorted. Using firm-level administrative data from France to discipline our model, we find that correcting the product market distortions induced by markups increases the long-run growth rate of productivity by 1.2 percentage points per year. Nearly 75% of this faster productivity growth can be achieved by simply reallocating R&D resources across firms, revealing that the dispersion in markups, rather than their average level, is more detrimental to economic growth.

With Mohamad Adhami and Emma Rockall.