Declining Share of Small Firms in U.S. Output: Causes and Consequences

We develop a dynamic general equilibrium model, with large and small firms, to examine possible causes and welfare implications of a declining trend in small firms' share of U.S. output since 1958. Numerical experiments indicate that recent technological advances and government tiering policies that have reduced fixed setup costs of production benefit the emergence of small firms, but lower their output share due to competition for resources among firms. However, this outcome is welfare improving. Therefore, if the policy objective is to raise small firms' output share and economic welfare simultaneously, it is desirable to concentrate on increasing antitrust and deregulatory efforts.