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Danial LASHKARI - Boston College

" Information Technology and Returns to Scale " joint with Arthur Bauer

Abstract :
The rise of Information Technology (IT) is often linked to recent secular macroeconomic trends such as the fall in the labor share and the rise in industry concentration. This paper demonstrates a novel causal mechanism through which the fall in the price of IT capital contributes to these trends. It relies on newly constructed measures of software and hardware capital in the universe of French firms to document a strong correlation between firm size and the intensity of demand for IT. Using exogenous destination-level demand shocks in the sample of exporting firms, the paper identifies a positive elasticity of IT intensity with respect to firm output. A simple heterogeneous-firm model of industry equilibrium can rationalize these empirical patterns, if firm-level production function is nonhomothetic and the relative marginal product of IT rises with output. Given a large fall in the price of IT inputs, the calibrated model generates a sizable rise in industry concentration, and a fall in aggregate labor share and entry.