Equilibrium Indeterminacy When Only Some Firms Are Scalable

We study a macroeconomy in which firms differ in the strength of scale economies. A subset of firms operates under increasing returns to scale, which endogenously leads them to become larger, capture greater market shares, and exert more goods-market power than peers. The framework can simultaneously account for observed employment shares and markups of top firms. We characterize how heterogeneity in productivity and scalability affects aggregate outcomes and the propagation of shocks. We show that for empirically relevant parameterizations, the heterogeneity gives rise to equilibrium indeterminacy, allowing for self-fulfilling fluctuations. Using an estimated version of the model, we quantify the extent to which non-fundamental disturbances ("animal spirits") contribute to business cycle fluctuations in key macroeconomic aggregates.