Large Firms and Innovation-Led Growth

This dissertation consists of two self-contained essays on economic growth. Chapter 2, "Large firms and long-run growth" studies the effect of the rise in the market share of large firms on long and medium run productivity growth. The market share of large firms in the U.S. has been on the rise in the past three decades. This paper quantifies the effects of this change on labor productivity growth. It develops a tractable endogenous growth model with both large and small firms, and shows that as the market share of large firms increases, productivity growth first increases and then declines. This is due to the change in the incentive of large firms to do research and development (R&D). To validate this relationship, the paper uses a panel of U.S. industries and documents that the industry level R&D-intensity has an inverted-U relationship with the market share of large firms. To explore the macro implications of this mechanism, the paper calibrates the model to match the aggregate moments of the U.S. economy. The exercise shows that as the market share of large firms increased, productivity growth increased until the late nineties and then declined. An important implication of the model is that as the economy becomes more concentrated, recessions become deeper and recoveries become slower.

Chapter 3, "Implications of tax Policy for innovation and aggregate productivity growth" studies the effect of corporate and individual taxes on productivity growth. The quantitative implications of income taxation for innovation and aggregate productivity growth are evaluated in the context of a Schumpeterian model of innovation-led growth. In the model, innovation comes from entrant firms creating new products and from incumbent firms improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income (labor income, dividends, and capital gains) and (ii) corporate tax; (iii) a consumption tax; and (iv) government purchases. The model is further restricted to fit observations for the post-war U.S. economy. The results suggest that endogenous movements in TFP constitute a quantitatively important channel for the transmission of tax policy to real GDP growth. Endogenous market structure plays a key role in the propagation of tax shocks.