Automation and the rise of superstar firms

We provide empirical evidence suggesting that the rise of superstar firms is linked to automation. We explain this empirical link in a general equilibrium framework with heterogeneous firms and variable markups. Firms can operate a labor-only technology or, by paying a per-period fixed cost, an automation technology that uses both workers and robots. The fixed costs lead to an economy-of-scale effect of automation, such that larger and more productive firms are more likely to automate. Automation boosts labor productivity, allowing those large firms to expand further, raising industry concentration. Since robots substitute for workers, increased automation raises sales concentration more than employment concentration, consistent with empirical evidence. Under our calibration, a modest robot subsidy mitigates markup distortions and improves welfare by stimulating automation investment, bringing aggregate output closer to the efficient level.