Mind the Knowledge Gap! The Origins of Declining Business Dynamism in a Macro Agent-Based Model

In this paper we replicate most of the stylized facts characterizing the decline in business
dynamism in the USA highlighted by Akcigit and Ates (2021) and provide an explanation of their
emergence by means of a macroeconomic agent-based model populated by two types of firms:
innovators who generate new and more productive capital goods, and entrepreneurs who employ
labor and capital goods to produce consumption goods. A key ingredient of the model is the
assumption that the entrepreneurs’ access to new and better capital goods depends on the
knowledge gap, i.e., the wedge between the firm’s technical knowledge and the state of
technology embodied in new capital goods. Within this framework, we investigate the obstacles
to knowledge diffusion subsequently leading to declining business dynamism. Our findings
indicate that only when knowledge diffusion decreases in both the technology imitation and
adoption processes does it lead to high market concentration and markups, falling labor share and
productivity growth. Patents are an important obstacle to knowledge diffusion. We find an inverse
U-shaped relationship between patent strength and growth: moderate levels of patent protection
can stimulate growth, but strong protection leads to rising market power and slower growth.