Endogenous Returns to Scale

We develop a general equilibrium model in which firms choose how scalable their production technologies are. More scalable technologies make it easier for firms to expand output but are less effective at small scale. In equilibrium, more productive firms adopt more scalable technologies and grow disproportionately large. As a result, the tail of the size distribution becomes thicker and, as resources reallocate to the most productive producers, GDP increases. Over the long-run, as aggregate productivity rises, firms adopt more scalable technologies, which lowers input prices, leading to further increases in scalability. Through this supply-chain amplification process, endogenous returns to scale raise the growth rate of GDP. A calibrated version of the model shows that these effects are quantitatively significant. We also document support for the model's predictions in firm-level data.