Abstract
This paper explores the impact of technological change on industry concentration and the underlying firm dynamics. In the agent-based model EURACE@Unibi I implement a paradigm shift in the technological frontier – a shift from a slow to a fast growing regime. The analysis shows that the acceleration in technological change causes a strong increase in market concentration. The reallocation of market shares towards a few large firms is driven by diverging productivities and skills across firms. An ex-post analysis reveals that after the paradigm shift small, but undervalued firms become the large dominating ones in the long-run. Their success gets initiated by a fortunate outcome on the labor market, which increases their skill level. With the faster technological change, their high skilled workforce incentivizes them to invest at the frontier and to build up the most productive capital stock. A virtuous cycle between their decisions on the labor and capital market further increases the productivity gap towards competitors enabling their rise.
Highlights
Industry concentration increases since the 1980s in the U.S (Autor et al, 2020; Bessen, 2020) and more recently in Europe (Bajgar et al, 2019)
This paper takes a closer look at the firm-level mechanisms and determinants that can explain the rise of large dominant firms after an acceleration in technological change
The simulation results show the generic emergence of a few large firms after a paradigm shift in the technological regime
Summary
Industry concentration increases since the 1980s in the U.S (Autor et al, 2020; Bessen, 2020) and more recently in Europe (Bajgar et al, 2019). Bajgar et al, 2019 provide evidence on Europe and U.S concluding that 3 out of 4 industries experienced a rise in concentration. Several studies document an increasing divergence across firms in terms of productivity (Andrews et al, 2015) and skills (Song et al, 2019) as well as a general decline in industry dynamics (Bessen et al, 2020). A few firms operate at the productivity frontier, while the rest of the firm population is left behind. This poses the question on the underlying dynamics that result in this polarization
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