Firm Ex Ante Heterogeneity, Entry, and the Labour Share

Grazzini, Jakob and Rossi, Lorenza (2023) Firm Ex Ante Heterogeneity, Entry, and the Labour Share. Economic Journal, 133 (649). pp. 235-257. ISSN 0013-0133

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Abstract

This paper considers a two-sector RBC model augmented with firm heterogeneity and firm dynamics and studies the steady state and dynamic properties of the model in response to a decline in the relative price of investment. It shows that both firm heterogeneity and entry play a crucial role in the decline in the labour share and the increase in capital intensity observed in the US economy. Using ORBIS firm-level data of the US economy, the paper finds robust evidence consistent with the mechanisms described in the model.