Growth, inequality, and declining business dynamism in a unified Schumpeter Mark I + II model

Abstract I develop a Schumpeterian agent-based model in which the entry and exit of firms, their productivity and markup, the birth of new industries, and the social structure of the population are endogenous. I use this model to study the causes of rising inequality and declining “business dynamism” since the 1980s. My hybrid model combines features of (i) the so-called Schumpeter Mark I (centering around the entrepreneur), (ii) the Mark II model (emphasizing the innovative capacities of firms), and (iii) Cournot competition, with firms using ordinary least squares learning to estimate the market environment and the behavior of their competitors. A scenario that is quantitatively calibrated to US data on growth and inequality replicates a large number of stylized facts regarding the industry life cycle, growth, inequality, and all 10 stylized facts on “declining business dynamism” in the USA proposed by Akcigit and Ates (2021, AEJ: Macroeconomics, 13[1], 257–298). Counterfactual simulations show that antitrust policy is highly effective at combatting inequality and at increasing business dynamism and growth but is subject to a conflict of interest between workers and firm owners, as gross domestic product and wages grow at the expense of profits. I further explore how technological factors interact with “Mark I” and “Mark II” in my model to shape dynamics of growth, inequality, and business dynamism.