Interest Rates and the Rise of Superstar Firms

Abstract

We examine how the rise of leading companies of this age affects real interest rates. We define “superstar firms” as firms with higher productivity growth and less investment relative to their value-added, and we construct analytic and quantitative overlapping generations models in which superstar firms replace other firms. We show that technological changes that benefit superstar firms decreases the interest rate and can make the economy dynamically inefficient. The result is fundamentally different from the result obtained from the constant elasticity of substitution aggregate production function under which the factor-augmenting technological progress would not decrease the interest rate. Moreover, in our framework, the consequences of technological change that benefits superstar firms are consistent with other stylized facts such as the change in factor shares and the increase in household inequality. Finally, in a quantitative life-cycle model, we show that the rise of superstar firms accounts for 8.4% of the entire decline in the natural rate of interest in the United States from 1970 to 2015.