Scaling Laws

Kevin Lewis

May 15, 2024

100 Years of Rising Corporate Concentration
Spencer Kwon, Yueran Ma & Kaspar Zimmermann
American Economics Review, forthcoming

We collect data on the size distribution of U.S. businesses for 100 years, and use these data to estimate the concentration of production (e.g., asset share or sales share of top businesses). The data show that concentration has increased persistently over the past century. Rising concentration was stronger in manufacturing and mining before the 1970s, and stronger in services, retail, and wholesale after the 1970s. The results are robust to different measurement methods and consistent across different historical sources. Our findings suggest that large firms have become more important in the U.S. economy for a long period of time.

U.S. Market Concentration and Import Competition
Mary Amiti & Sebastian Heise
Review of Economic Studies, forthcoming

Many studies have documented that the sales concentration of U.S. producers has risen in recent decades. In this paper, we show that this increase was accompanied by more entry and growth of foreign competitors. Using confidential census data covering the universe of all firm sales in the U.S. manufacturing sector, we find that rising import competition increased concentration among U.S. firms by reallocating sales from smaller to larger U.S. firms and by causing firm exit. However, this increase in production concentration was counteracted by the expansion of foreign firms, which reduced domestic firms’ share of the U.S. market inclusive of foreign firms’ sales. We find that once the sales of foreign exporters are taken into account, U.S. market concentration in manufacturing was stable between 1992 and 2012.

Why Has Construction Productivity Stagnated? The Role of Land-Use Regulation
Leonardo D'Amico et al.
Harvard Working Paper, December 2023

Why does it cost so much to build a home? We formalize and evaluate the hypothesis that land-use regulation reduces the average size of home builders, which limits their ability to reap returns from scale and their incentives to invest in technology. Our model distinguishes between regulation of entry, which acts as a fixed cost and increases equilibrium firm size, and project-level regulation, which reduces project and firm size. If larger firms have stronger incentives to invest in technology, then such investment partially offsets the harm that regulation of entry does to consumers, but reduced investment exacerbates the negative impacts of project-level regulation. We document that the US has higher production costs than comparably wealthy countries, and that these costs are higher in more regulated American cities. Homes built per construction worker remained stagnant between 1900 and 1940, boomed after World War II, and then plummeted after 1970 just as land-use regulations soared. Residential construction firms are small, relative to other industries like manufacturing, and smaller firms are less productive. More regulated metropolitan areas have smaller and less productive firms. Under the assumption that one half of the link between size and productivity is causal, America’s residential construction firms would be 91% percent more productive if their size distribution matched that of manufacturing.

Algorithmic Collusion by Large Language Models
Sara Fish, Yannai Gonczarowski & Ran Shorrer
Harvard Working Paper, March 2024

The rise of algorithmic pricing raises concerns of algorithmic collusion. We conduct experiments with algorithmic pricing agents based on Large Language Models (LLMs), and specifically GPT-4. We find that (1) LLM-based agents are adept at pricing tasks, (2) LLM-based pricing agents autonomously collude in oligopoly settings to the detriment of consumers, and (3) variation in seemingly innocuous phrases in LLM instructions ("prompts") may increase collusion. These results extend to auction settings. Our findings underscore the need for antitrust regulation regarding algorithmic pricing, and uncover regulatory challenges unique to LLM-based pricing agents.

Amazon Self-preferencing in the Shadow of the Digital Markets Act
Joel Waldfogel
NBER Working Paper, April 2024

Regulators around the world are discussing, or taking action to limit, self-preferencing by large platforms. This paper explores Amazon's search rankings of its own products as the European Union's Digital Markets Act (DMA) was coming into effect. Using data on over 8 million Amazon search results at 22 Amazon domains in the US, Europe, and elsewhere, I document three things. First, conditional on rudimentary product characteristics, Amazon's own products receive search ranks that are 24 positions better on average throughout the sample period. Second, the Amazon rank differential is large in comparison with the differential for 142 other popular brands. Third, shortly after the EU designated Amazon a “gatekeeper” platform in September 2023, the Amazon rank differential fell from a 30 position advantage to a 20 position advantage, while other major brands' rank positions were unaffected. The changed Amazon search rankings appear in both Europe and other jurisdictions.

A hazard analysis of federal permitting under the National Environmental Policy Act of 1970
Michael Bennon, Daniel De La Hormaza & Richard Geddes
Journal of Regulatory Economics, June 2024, Pages 154-183

The National Environmental Policy Act (NEPA) of 1970 requires federal agencies to assess the environmental impact of proposed federal actions. NEPA thus affects delivery of a wide range of infrastructure projects. NEPA requires the completion of an Environmental Impact Statement (EIS) for environmentally impactful federal actions. For infrastructure projects this can entail significant delays. A typical EIS now takes about four and one-half years and is over 600 pages long. Some EIS’s take over a decade to complete. We provide the first detailed analysis of project approval times under NEPA by examining 1269 EIS permitting processes. We analyze empirically the well-defined interval from Notice of Intent to file to Record of Decision (ROD). We use a Cox proportional hazard model to estimate the impact of several factors on EIS duration. Factors include permits featuring major construction, those including private investment, those for projects located in states with restrictive environmental laws, those using the federal permitting “dashboard,” and those publishing a Supplemental EIS prior to the ROD. We find that privately financed projects receive faster permitting, while projects involving major construction, those undertaken in restrictive states, and those utilizing the federal permitting dashboard, face slower permitting times. We also explore links between EIS page counts and permitting time. Greater EIS page counts are associated with longer permitting times. We conclude by examining EIS completion during economic stimulus programs such as the American Recovery and Reinvestment Act (ARRA), as well as the frequency of EIS completion by the federal government.

Three Things about Mobile App Commissions
Joshua Gans
NBER Working Paper, April 2024

Mobile app commissions paid by app developers to a monopolist device maker/app store operator are examined. Three results are demonstrated. First, unregulated app commissions are set at a level that maximises consumer surplus. Second, eliminating app commissions will lead to higher device prices. Third, requiring a menu of options for consumers as to how device makers receive subsidies from app developers constrains app commissions in a way that provides a more equal balance between consumer versus app developer interests.

Does the CARD Act Affect Price Responsiveness? Evidence from Credit Card Solicitations
Yiwei Dou, Geng Li & Joshua Ronen
Journal of Banking & Finance, July 2024

The CARD Act restricts consumer credit card issuers’ ability to raise interest rates. We examine whether the Act influences the degree to which an issuer adjusts offered interest rates in response to changes in interest rates offered by other lenders in credit card solicitations -- the price responsiveness. Using small business card offers as a control group, we find a significant decline in the price responsiveness after the Act. The decline is concentrated among other lenders’ rate reductions rather than rate increases and is more pronounced in areas with more subprime borrowers. The results underscore an unintended consequence of regulating the consumer credit market.

Noisy Experts? Discretion in Regulation
Sumit Agarwal et al.
NBER Working Paper, April 2024

While reliance on human discretion is a pervasive feature of institutional design, human discretion can also introduce costly noise (Kahneman, Sibony, and Sunstein 2021). We evaluate the consequences, determinants, and trade-offs associated with discretion in high-stake decisions assessing bank safety and soundness. Using detailed data on the supervisory ratings of US banks, we find that professional bank examiners exercise significant personal discretion -- their decisions deviate substantially from algorithmic benchmarks and can be predicted by examiner identities, holding bank fundamentals constant. Examiner discretion has a large and persistent causal impact on future bank capitalization and supply of credit, leading to volatility and uncertainty in bank outcomes, and a conservative anticipatory response by banks. We identify a novel source of noise: weights assigned to specific issues. Disagreement in ratings across examiners can be attributed to high average weight (50%) assigned to subjective assessment of banks’ management quality, as well as heterogeneity in weights attached to more objective issues such as capital adequacy. Replacing human discretion with a simple algorithm leads to worse predictions of bank health, while moderate limits on discretion can translate to more informative and less noisy predictions.

Monopolization with Must-Haves
Enrique Ide & Juan-Pablo Montero
American Economic Journal: Microeconomics, forthcoming

An increasing number of monopolization cases have been constructed around the notion of “must-have” items: products that distributors must carry to “compete effectively.” Motivated by these cases, we consider a multiproduct setting where upstream suppliers sell their products through competing distributors offering onestop-shopping convenience to consumers. We show the emergence of products that distributors cannot afford not to carry if their rivals do. A supplier of such products can exploit this must-have property, along with tying and exclusivity provisions, to monopolize adjacent, otherwise competitive markets. Policy interventions that ban tying or exclusivity provisions may prove ineffective or even backfire.

Ethics and Illusions: How Ethical Declarations Shape Market Behavior
John Barrios et al.
NBER Working Paper, April 2024

We examine the impacts of ethical declarations on market transactions through a controlled laboratory experiment, where privately-informed sellers issue a public report prior to a first-price auction. We find that while signing an ethical statement does not reduce misreporting by sellers, it significantly increases buyer trust, often skewing the terms of the trade in favor of sellers. Contrary to rational expectations, buyers consistently struggle to undo the bias. In counterfactual scenarios, from our structural analysis, we find that price efficiency improves when buyers rationally process uncertainty about sellers' ethical preferences, yet bias persists even when buyers have more accurate perceptions of sellers'’ ethical standards. Overall, our results suggests that disclosure interventions aimed at enhancing ethical conduct in market settings may not necessarily lead to more efficient pricing or reduced bias, and in some instances, may even disadvantage certain market participants.

Technological Progress and Rent Seeking
Vincent Glode & Guillermo Ordoñez
NBER Working Paper, April 2024

We model firms’ allocation of resources across surplus-creating (i.e., productive) and surplus-appropriating (i.e., rent-seeking) activities. Our model predicts that industry-wide technological advancements, such as recent progress in data collection and processing, induce a disproportionate and socially inefficient reallocation of resources toward surplus-appropriating activities. As technology improves, firms rely more on appropriation to obtain their profits, endogenously reducing the impact of technological progress on economic progress and inflating the price of the resources used for both types of activities. We apply our theoretical insights to shed light on the rise of high-frequency trading.


from the


A weekly newsletter with free essays from past issues of National Affairs and The Public Interest that shed light on the week's pressing issues.


to your National Affairs subscriber account.

Already a subscriber? Activate your account.


Unlimited access to intelligent essays on the nation’s affairs.

Subscribe to National Affairs.