Essays in the macroeconomics of production scale

Abstract

This dissertation examines how firm-level scale and associated cost structures shape aggregate economic outcomes, through three interconnected essays. Chapter 1 (with Luis Perez) develops a framework showing that the aggregate profit share can be decomposed into four summary statistics: sales-weighted harmonic markups, a scale-elasticity adjustment capturing fixed and quasi-fixed costs, a monopsony term, and an input-output multiplier. We find that both measured markups and returns to scale rose in the United States between 1970 and 2020, but their opposing effects offset one another, leaving the aggregate profit share roughly unchanged. Chapter 2 investigates SG\&A labor as a source of scale effects by specifying a two-tier production function with distinct "production'' and "SG\&A'' inputs. Modeling SG\&A as quasi-fixed generates a U-shaped average-cost curve. Estimating a translog production function, I show that SG\&A plays a central role in understanding firm-level scale economies. Chapter 3 builds on these measurement insights by embedding heterogeneous firms into a dynamic general equilibrium model with endogenous entry, exit, and mergers. Merging firms combine their scale parameters (𝜓), which alters both their cost structures and pricing incentives. In an unconstrained equilibrium with unrestricted mergers, markups rise and output falls. A simple antitrust policy can reverse these effects, increasing output and reducing markups. Together, the essays highlight three core lessons: fixed and quasi-fixed costs are central to firm behavior; scale economies and market power are intrinsically linked; and mergers magnify scale advantages in ways that reshape competition and aggregate outcomes.