Seminar: Market Power and Innovation in the Intangible Economy

Productivity growth has stagnated over the past decade. This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I develop a quantitative framework in which intangibles reduce marginal costs, which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. The presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.4 percentage point decline in long-termproductivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, thoughmarkups overstate the increase in firmprofits.