Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory

Summary

"Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory" is a 2019 NBER working paper (No. 25755) by Ufuk Akcigit (University of Chicago) and Sina T. Ates (Federal Reserve Board of Governors), subsequently published in the American Economic Journal: Macroeconomics 13(1) in 2021. The paper reviews a broad empirical literature documenting a secular decline in US business dynamism since roughly 1980, organizes the evidence into ten stylized facts, and proposes a unifying theoretical framework — a step-by-step innovation model with endogenous markups and knowledge diffusion — to assess candidate explanations. The authors show analytically that a decline in the rate of knowledge diffusion from frontier firms to laggard followers can generate six of the ten facts jointly: rising market concentration, rising markups, rising profit share, falling labor share, a negative association between concentration and labor share, and a widening productivity gap between frontier and laggard firms. The paper also presents new USPTO patent evidence consistent with a slowdown in knowledge diffusion.

The Ten Stylized Facts

The paper catalogues ten empirical trends documented across the US economics literature:

1. Market concentration has risen — the share of sales captured by the largest firms within industries has increased since the 1980s, as documented by Autor et al. (2017) and Grullon et al. (2017), among others.
2. Average markups have increased — citing De Loecker and Eeckhout (2017), the paper reproduces the finding that US markups have risen over recent decades, while noting the Traina (2018) critique that including SG&A expenses in variable costs substantially attenuates the measured increase.
3. Average profits have increased — the corporate profit share of GDP has risen, as calculated from BEA NIPA data.
4. The labor share of output has declined — consistent with Karabarbounis and Neiman (2013) and Elsby et al. (2013).
5. Rising concentration and falling labor share are negatively associated — industries with the largest increases in concentration also show the largest declines in labor share (Autor et al. 2017).
6. The productivity gap between frontier and laggard firms has widened — the top 5% most productive firms have pulled away from the rest, as documented by Andrews et al. (2015, 2016).
7. The firm entry rate has declined — new business creation has fallen steadily since the 1980s (Decker et al. 2016; Karahan et al. 2016).
8. The share of young firms in economic activity has declined — firms less than five years old account for a shrinking share of employment (Decker et al. 2016).
9. Job reallocation has slowed — gross job creation and destruction rates have both fallen (Decker et al. 2016).
10. The dispersion of firm growth rates has decreased — the standard deviation of firm growth has shrunk, particularly in high-tech sectors post-2000 (Decker et al. 2016).

The Theoretical Framework

The authors build a step-by-step innovation model of endogenous growth in which each product line is served by two competing firms — a leader and a follower — competing à la Bertrand. Firms invest in R&D to improve their productivity and capture market leadership. The model features two key mechanisms:

• A composition effect: the share of "unleveled" sectors (where one firm has a strict productivity advantage) determines aggregate concentration, markups, and the labor share.
• An incentive effect: firms' innovation efforts respond to the value of market leadership, which depends on the ease with which followers can catch up.

The critical parameter is δ, the exogenous rate of knowledge diffusion — the probability that a follower catches up with the leader, bringing both firms to a "neck-and-neck" position. Lower δ represents slower knowledge diffusion (e.g., from stronger intellectual property protection, proprietary data, or regulatory barriers).

Key Result: Slowing Knowledge Diffusion as a Unifying Driver

The paper's central analytical result is that a decline in δ generates predictions consistent with Facts 1–6:

• Concentration rises (Fact 1): fewer sectors are in the neck-and-neck state where competition is strongest; more are dominated by a single leader.
• Markups rise (Fact 2): average markups are proportional to the share of unleveled sectors, which increases as δ falls.
• Profits rise (Fact 3): the aggregate profit share of GDP is proportional to the share of unleveled sectors.
• Labor share falls (Fact 4): in unleveled sectors, the leader's markup comes at the expense of labor compensation; the labor share is 100% in leveled sectors but only 1/λ in unleveled ones.
• Concentration and labor share are negatively associated (Fact 5): within the model, more concentrated sectors have lower labor shares.
• The productivity gap widens (Fact 6): the average productivity gap between leaders and followers is proportional to the share of unleveled sectors.

The model is silent on Facts 7 and 8 (firm entry and young firms) because it abstracts from free entry for analytical tractability. Results for Facts 9 and 10 (job reallocation and growth dispersion) are ambiguous in the balanced-growth-path analysis, depending on the relative magnitudes of the composition and incentive effects, and require quantitative investigation — which the authors undertake in a companion paper (Akcigit and Ates 2019, NBER WP 25756).

New Empirical Evidence on Knowledge Diffusion

The paper contributes original USPTO patent evidence supporting the knowledge-diffusion-slowdown hypothesis:

• Since the mid-1980s, the share of reassigned patents held by the top 1% of patent buyers has risen steadily — consistent with large firms acquiring competitors' intellectual property before knowledge spillovers materialize.
• The share of patents applied for by the top 1% of firms with the largest patent stocks has also increased substantially — indicating growing patent concentration.

The authors note that these trends are consistent with their mechanism: distortions in knowledge flow between frontier and follower firms, driven by data hoarding, regulatory barriers, offshoring, and anti-competitive use of intellectual property.

Candidate Causes and Rival Explanations

The paper surveys several alternative explanations from the literature:

• Demographic shifts: Karahan et al. (2016) attribute declining entry to the slowdown in labor-force growth.
• Ideas getting harder to find: Gordon (2016) and Bloom et al. (2017) argue that research productivity has fallen.
• Superstar firms: Autor et al. (2017) and Kehrig and Vincent (2018) document a shift of value added toward hyper-productive, low-labor-share firms — a mechanism the authors note is consistent with their model's composition effect.
• Intangibles: Crouzet and Eberly (2018) document that intangible capital use is associated with concentration, partially explaining high measured profits as returns to real (if hard-to-measure) investment.
• Regulation and lobbying: Bessen (2016) argues that political rent-seeking played a disproportionate role in rising profit margins; Grullon et al. (2017) find support for weaker antitrust enforcement.

The authors argue that in their companion quantitative study, declining knowledge diffusion is the only margin among competing alternatives — including changes in entry costs, corporate tax schemes, and R&D tax incentives — that can explain all observed trends both qualitatively and quantitatively.

Relation to the Georgist Case

This paper is not a Georgist document and makes no reference to land, rent theory, or Henry George. Its relevance to the Georgist framework is structural and indirect: it documents, using mainstream macroeconomic and industrial-organization tools, that a growing wedge between price and marginal cost has opened across the US corporate sector — manifested in rising markups, rising profit shares, and rising concentration — and that this wedge is associated with a falling labor share. By the classical definition, a persistent wedge between price and marginal cost is economic rent, and the paper's evidence thus supports the broader claim that corporate profits increasingly reflect rents rather than competitive returns to capital.

However, the paper's proposed mechanism — slowed knowledge diffusion — is distinct from the Georgist emphasis on land monopoly as the primary source of rent. The rents Akcigit and Ates identify arise from market position, intellectual property, and data control rather than from ownership of fixed natural resources. The paper is thus best read as a parallel rent-generalization: it extends the empirical case that growing rents are a real feature of the modern economy, while locating the source in knowledge diffusion and market power rather than in land. The policy implications differ accordingly — the paper's analysis points toward competition policy, intellectual-property reform, and data governance rather than land value taxation — though the underlying logic (tax or regulate the rent, not the production) is Georgist in spirit.

The paper also engages directly with the superstar firms literature and the markup measurement debate, noting the Traina (2018) critique that including SG&A expenses substantially attenuates the measured markup rise. This places the paper within the contested empirical landscape surrounding the rentier economy narrative.

Nuances and Limits

• Analytical, not quantitative: This paper derives qualitative predictions from a simplified model. The quantitative assessment — including transition dynamics and a head-to-head comparison of alternative explanations — is reserved for the companion paper (Akcigit and Ates 2019, NBER WP 25756).
• Silent on entry: The model abstracts from free firm entry, so it cannot directly address Facts 7 and 8 (declining entry rate and young-firm share), which are among the most prominent symptoms of declining dynamism.
• Ambiguous on growth: The model predicts a hump-shaped response of aggregate productivity growth to a decline in knowledge diffusion — an initial rise (from intensified neck-and-neck innovation) followed by a decline (as the economy shifts toward unleveled sectors) — which the authors note is consistent with the US "fast/slow" productivity cycle of the mid-1990s to mid-2000s, but this is suggestive rather than tested.
• Knowledge diffusion is a reduced-form parameter: The paper does not structurally estimate δ or directly measure the diffusion slowdown; it infers it from the consistency of the model's predictions with the data and from circumstantial USPTO patent evidence.
• Markup measurement contested: The paper acknowledges the Traina (2018) critique that the De Loecker and Eeckhout markup estimates may be inflated by excluding SG&A expenses, though it treats the rising-markup finding as broadly supported by multiple independent studies.

Bears On

• Corporate profits increasingly reflect rents — the paper documents rising markups, profit shares, and concentration as stylized facts and provides a theoretical mechanism (slowed knowledge diffusion) that generates them as equilibrium outcomes. The support is partial: the paper frames these as consequences of a specific diffusion mechanism rather than as evidence of "rents" per se, and the rising-markup evidence itself is contested on measurement grounds.
• Superstar Firms — the paper discusses the superstar-firms literature as a related explanation and its model's composition effect is structurally similar to the winner-take-most mechanism.
• Economic Rent — the rising markups and profits the paper documents are, by definition, forms of economic rent, though the paper does not use that framing.
• The Rentier Economy — the paper's evidence on rising concentration and profits supports the broader narrative that a growing share of income rewards market position rather than production.

See Also

• Corporate Profits Increasingly Reflect Rents
• Superstar Firms
• De Loecker, Eeckhout & Unger — Markups
• Economic Rent
• The Rentier Economy

Sources

1. Ufuk Akcigit & Sina T. Ates (2019), "Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory," NBER Working Paper No. 25755. NBER — used for all ten stylized facts, the theoretical model, the knowledge-diffusion mechanism, and the USPTO patent evidence. Published version: American Economic Journal: Macroeconomics 13(1), 2021 [CITATION NEEDED: exact page range and DOI for the published AEJ:Macro version — not verified this session].
2. Ufuk Akcigit & Sina T. Ates (2019), "What Happened to U.S. Business Dynamism?," NBER Working Paper No. 25756 — referenced as the companion quantitative paper; not independently scanned this session [CITATION NEEDED: direct URL and verification of content].
3. David Autor, David Dorn, Lawrence Katz, Christina Patterson & John Van Reenen (2017/2020), "The Fall of the Labor Share and the Rise of Superstar Firms," NBER WP 23396 / QJE 135(2) — cited in the paper for Facts 1, 4, 5, and the superstar-firms explanation; see also wiki page.
4. Jan De Loecker & Jan Eeckhout (2017), "The Rise of Market Power and the Macroeconomic Implications," NBER WP 23687 — cited in the paper for Fact 2 (rising markups); see also wiki page.
5. James Traina (2018), "Is Aggregate Market Power Increasing? Production Trends Using Financial Statements," Stigler Center Working Paper — cited in the paper for the SG&A measurement critique of markup estimates.
6. Dan Andrews, Chiara Criscuolo & Peter N. Gal (2016), "The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy," OECD Productivity Working Paper 5/2016 — cited for Fact 6 (frontier-laggard productivity divergence) and the knowledge-diffusion argument.
7. Simcha Barkai (2017/2020), "Declining Labor and Capital Shares" — cited for the link between higher concentration and lower labor and capital shares; see also wiki page.
8. Nicolas Crouzet & Janice Eberly (2018/2019), "Understanding Weak Capital Investment: The Role of Market Concentration and Intangibles," NBER WP 25869 — cited for the intangibles counter-interpretation; see also wiki page.

[CITATION NEEDED: the published AEJ:Macro 13(1) version's exact page range, DOI, and any differences from the NBER working-paper version — this session worked from the NBER WP 25755 PDF; the published version could not be directly fetched and verified.]