Scale-biased technical change and inequality

Reichardt, Hugo

Scale-biased technical change and inequality

Citation

Reichardt, H. Scale-biased technical change and inequality. 2024. handle: http://hdl.handle.net/10230/69690

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Abstract

Scale bias is the extent to which technical change increases the productivity of large relative to small firms. I show that this dimension of technical change is important for inequality. To illustrate the mechanism, I develop a tractable framework where people choose to work for wages or earn profits as entrepreneurs and where entrepreneurs choose from a set of available production technologies that differ in their fixed and marginal cost. Large-scale-biased technical change lowers entrepreneurship rates and increases top income inequality, primarily by concentrating business income. Small-scale-biased technical change does the opposite. I show the empirical relevance of scale bias by identifying the causal effects of adoption of two general purpose technologies that vary in scale bias, but are otherwise similar: steam engines (large-scale-biased) and electric motors (small-scale-biased). Using newly collected data from the United States and the Netherlands and a range of identification strategies, I show that these two technologies had opposite effects on firm sizes and inequality. Steam engines increased firm sizes and inequality, while electric motors decreased both. Consistent with scale bias (rather than skill bias), I find that adopting entrepreneurs were the main drivers of inequality increases after steam engine adoption.