Top Firms Hurt Economy by Hoarding Know-How: Jackson Hole Paper

The slowdown in productivity growth in the U.S. in recent decades may be linked to a decline in the rate at which knowledge from new innovations is diffused between companies, according to a new paper presented Thursday at the Federal Reserve’s annual Jackson Hole conference.

“A decline in knowledge diffusion, which allows laggard firms to learn from and implement the practices of the frontier firms, has potentially obstructed rivals from exerting enough competitive pressure on the frontier firms, leading dynamically to a decline in leaders’ incentives to experiment and innovate,” Ufuk Akcigit, an economist at the University of Chicago, and Sina Ates, an economist at the Fed, say in the paper.

The annual policy symposium hosted by Kansas City Fed is being conducted virtually this year due to the coronavirus pandemic, rather than in its traditional location in Jackson Hole, Wyoming.

Big Tech

The research comes amid growing political pressure on big Silicon Valley tech firms like Alphabet Inc.’s Google and Facebook Inc., which have faced calls from politicians to be broken up in recent years. Shares of those companies have helped propel the U.S. stock market to record highs during the pandemic despite a broader economy still reeling from the impact of the virus.

Akcigit and Ates highlight a rising concentration of patents in the hands of the biggest companies, as well as an increasing share of inventors being hired and employed by those companies. They also suggest lax enforcement of antitrust laws may have played a role in allowing those trends to develop.

For the Fed, lower productivity growth means lower interest rates. The central bank is expected to soon announce the results of a review of its monetary policy framework that it launched in 2019, which many Fed-watchers expect will result in a more-relaxed attitude toward fighting inflation.

According to Akcigit and Ates, the pandemic may worsen the outlook for productivity growth in the future if it allows big companies to take advantage of their smaller rivals, leading to even less competition.

“The current global economic conditions could exacerbate the state of business dynamism, as the COVID-19-related disruptions weigh disproportionately on small and medium enterprises,” they say.

“Such asymmetric effects could lead to the consolidation of sectoral economic activity in a small number of large firms, impairing the competitive environment and thus business dynamism in the post-pandemic economies.”

©2020 Bloomberg L.P.

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