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The Darwinian Returns to Scale


Time: 8:00 pm-9:30 pm, Apr. 8th, 2022

Platform: Zoom

Speaker: David Baqaee


Link: https://us06web.zoom.us/j/81626164288?pwd=Zmp1VG41dXF0by9UZTBRVkxSbjJWZz09

Meeting ID: 816 2616 4288

Passcode: inse



How does an increase in market size, say due to globalization, affect welfare? We study this question using a model with monopolistic competition, heterogeneous markups, and fixed costs. We characterize the change in welfare in the decentralized equilibrium, and decompose it into changes in technical efficiency and allocative efficiency. Allocative efficiency changes due to three different types of reallocations: (1) reallocations across firms with heterogeneous price elasticities due to increased entry, (2) reallocations due to the exit of marginally profitable firms, and (3) reallocations due to changes in firms’ markups. Whereas the second and third effects have ambiguous implications for welfare, the first effect, which we call the Darwinian effect, always increases welfare regardless of the shape of demand curves. We non-parametrically calibrate residual demand curves with firm-level data from Belgian manufacturing firms and quantify our theoretical results. We find that mild increasing returns at the micro level can catalyze large increasing returns at the macro level. These aggregate gains are due to the Darwinian effect, which reallocates resources from low- to high-markup firms, and not the death of unproductive firms (2) or changes in markups (3). Our results suggest that a policy-maker can harness Darwinian reallocations in an economy with fixed resources by subsidizing firm entry.





Professor David Baqaee is an Assistant Professor of Economics at UCLA. He is also a research affiliate of the Center for Economic Policy Research. Prior to joining UCLA, he worked as an assistant professor of economics at LSE. He is interested in areas including Macroeconomics, Network Economics, IO and Applied Economic Theory. He works on aggregation in disaggregated macroeconomic models, with an emphasis on the role production networks play in business cycles, growth, and international trade. In his research, he studies how the interconnected, detailed production structure of the microeconomy affects the behavior of aggregate macroeconomic variables like GDP, employment, and productivity. His research has been published in leading academic journals including the American Economic ReviewEconometrica, the Journal of Political Economy and the Journal of Monetary Economics. He received his Ph.D. in economics from Harvard University in 2015.