Information Technology and Returns to Scale

Coauthors: Arthur Bauer, Jocelyn Boussard

Conditionally Accepted, American Economic Review

First Draft: May 2018  / Current Draft: June 2023


What are the implications of the dramatic fall in IT prices for aggregate technology? In a theory with arbitrary firm-level technologies, a factor price shock may lead to a substitution between factors and/or an endogenous response of returns to scale. The second channel is governed by the output elasticity of relative factor demand. Using detailed firm-level data from France, we estimate this elasticity to be positive for IT factor demand. A quantitative model featuring both technological channels predicts that falling IT prices explain around half of the changes in concentration and in the composition of aggregate labor share in France.