The Darwinian Returns to Scale

David Baqaee, Emmanuel Farhi and Kunal Sangani

No 27139, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How does an increase in market size, say due to globalization, affect welfare? We study this question using a model with monopolistic competition, heterogeneous markups, and fixed costs. We characterize changes in welfare and decompose changes in allocative efficiency into three different effects: (1) reallocations across firms with heterogeneous price elasticities due to intensifying competition, (2) reallocations due to the exit of marginally profitable firms, and (3) reallocations due to changes in firms’ markups. Whereas the second and third effects have ambiguous implications for welfare, the first effect, which we call the Darwinian effect, always increases welfare regardless of the shape of demand curves. We non-parametrically calibrate demand curves with data from Belgian manufacturing firms and quantify our results. We find that mild increasing returns at the micro level can catalyze large increasing returns at the macro level. Between 70–90% of increasing returns to scale come from improvements in how a larger market allocates resources. The lion’s share of these gains are due to the Darwinian effect, which increases the aggregate markup and concentrates sales and employment in high-markup firms. This has implications for policy: an entry subsidy, which harnesses Darwinian reallocations, can improve welfare even when there is more entry than in the first-best.

JEL-codes: E0 E1 E23 O24 O4 O41 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-eff and nep-mac
Note: EFG ITI PR
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Published as David Rezza Baqaee & Emmanuel Farhi & Kunal Sangani, 2024. "The Darwinian Returns to Scale," Review of Economic Studies, vol 91(3), pages 1373-1405.

Downloads: (external link)
http://www.nber.org/papers/w27139.pdf (application/pdf)

Related works:
Journal Article: The Darwinian Returns to Scale (2024)
Working Paper: Darwinian Returns to Scale (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:27139

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w27139

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().