To explain these trends, we develop a new model of endogenous team formation within firms and embed it in a general equilibrium model of the inventor labor market. Teams increase firms’ returns to scale by increasing the likelihood of productive matches between inventors. The value of these matches rises over time, possibly driven by increasing knowledge specialization. This causes large firms to expand and small firms to shrink in equilibrium, accounting for the observed increase in inventor employment concentration. Because firms do not internalize knowledge spillovers, there is misallocation of inventors across firms. The rise of team production amplifies this misallocation by a factor of six by reallocating inventors away from small firms that generate disproportionately large knowledge spillovers.

View the Full Working Paper