Information Technology and Returns to Scale

What are the implications of the dramatic fall in IT prices for aggregate technology? When firm-level technologies are continuously differentiable , a factor price shock leads to ( i ) a substitution between factors and / or ( ii ) an endogenous response of returns to scale. The second channel is governed by the output elasticity of relative factor demand. Using detailed firm-level data from France , we estimate this elasticity to be positive for IT factor demand. A quantitative exercise accounting for both technological channels shows that falling IT prices can explain much of the changes in concentration and the composition of aggregate labor share in France.