We develop a theoretical framework to investigate the link between rising scale economies and stagnating productivity. Our model features heterogeneous firms, imperfect competition, and firm selection. We demonstrate that scale economies generated by fixed costs have distinct impacts on aggregate productivity compared to those driven by returns to scale (slope of marginal cost). Using UK data, we estimate long-run increases in both fixed costs and returns to scale. Our model implies that this should increase aggregate productivity through improved firm selection and resource allocation. However, increasing markups can offset the productivity gain. Higher markups cushion low-productivity firms’ revenues, allowing them to survive, and constrain firm output, which limits exploitation of scale economies.

While the vast majority of firms are small, large “superstar” firms play a key role in aggregate productivity and employment dynamics. But what determines the structure of superstar firms, and how do these choices feed into aggregate dynamics? Using novel UK firm-level microdata, we distinguish the contribution of three channels to superstar firm growth: scale, span and scope. We show the falling contribution of span and scope since the early 2000s, and construct a firm dynamics model with establishment creation and imperfect competition to rationalise the phenomenon. The key trade-off we capture is between economies of scope (which push firms towards a larger number of establishments) and correlated shocks across establishments (which limit expansion). The model allows us to explore the dynamics of establishment expansion at the firm level and the contribution to aggregate employment and productivity growth.

Policymakers around the world are exploring ways to tackle greenhouse gas emissions, but when evaluation focuses on narrow margins, policies can have unintended consequences. We study the phased introduction of London’s Ultra-Low Emissions Zone (ULEZ), a tax on highly-polluting vehicles. A simple model of location and commuting behaviour highlight four important margins of adjustment; vehicle investment, commuting mode, firm location and residential location. We study those four margins using an event study and regression discontinuity methods, and exploit the randomness of the precise borders and differential exposure of affected individuals based on their pre-existing commuting choices. We show the initial announcement of the ULEZ had large, significant positive effects on adoption of ultra-low emission vehicles. The policy had a positive effect on house prices within the zone. Individuals more exposed to the ULEZ used public transport more after the policy is introduced. Finally, we find that firms relocated outside the zone after the policy was announced. Within Greater London, response magnitudes on each margin vary substantially across space.