Economics Seminar - Joshua Weiss - "More Than the Sum of Its Parts: Makeup and the Role of Establishments"

We study how size-dependent establishment markups distort firm production along the intensive margin---how much to produce at each establishment---and the extensive margin---how many establishments to open. First, using data on the universe of Swedish firms and establishments in services industries, we find that 1) each successive establishment at a firm tends to be smaller and 2) firms with larger establishments set higher markups but firms with more establishments do not. Next, in a model of competition between firms through their establishments, we provide a theoretical characterization of the distortions implied by size-dependent establishment markups. Relative to a social planner, firms undervalue 1) production at larger establishments, 2) opening larger establishments, and 3) production at existing establishments relative to opening new establishments. Finally, in the model calibrated to our Swedish data, firms' extensive margin decisions are responsible for only 9% of the losses implied by these distortions. Nonetheless, firms' extensive margin decisions are crucial for the design of optimal firm size-dependent policy and sharply limit its effectiveness.