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Returns To Scale And Regional Growth: The Static-Dynamic Verdoorn Law Paradox Revisited

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Author Info
John S. L. McCombie
Mark Roberts

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Abstract

It has long been an article of faith amongst regional economists that increasing returns to scale are necessary to explain the punctiform location of economic activity and population. However, there is no consensus in the empirical literature over whether returns to scale are constant or increasing. A notable example of this lack of agreement is provided by the static-dynamic Verdoorn law paradox. While the dynamic Verdoorn law (specified using growth rates) yields estimates of substantial increasing returns to scale, the static Verdoorn law (specified using log-levels) indicates only the presence of constant returns to scale. In this paper, we explain the static-dynamic Verdoorn law paradox by showing that estimates of returns to scale obtained using the static law are subject to a spatial aggregation bias, which biases the estimates towards constant returns to scale. We illustrate our arguments by means of simulation exercises. The results obtained hold general lessons for applied economic analysis using spatial data. Copyright Blackwell Publishing, Inc. 2007

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9787.2007.00505.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Regional Science.

Volume (Year): 47 (2007)
Issue (Month): 2 ()
Pages: 179-208
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Handle: RePEc:bla:jregsc:v:47:y:2007:i:2:p:179-208

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  1. Kim, Man-Keun & Harris, Thomas R., 2008. "An Efficiency Analysis of Nevada and Utah Counties: Region Size Leads Regional Efficiency," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6338, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  2. Alvaro Angeriz & John McCombie & Mark Roberts, 2008. "Returns to Scale for EU Regional Manufacturing," Working Papers 20, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research. [Downloadable!]
  3. Richard Harris, 2008. "Models of Regional Growth: Past, Present and Future," SERC Discussion Papers 0002, Spatial Economics Research Centre, LSE. [Downloadable!]
  4. Carton, Christine, 2009. "Mecanismos kaldorianos del crecimiento regional: Aplicación empírica al caso del ALADI (1980-2007)
    [Kaldorian mechanisms of regional growth: An empirical application to the case of ALADI 1980-200    ," MPRA Paper 15675, University Library of Munich, Germany. [Downloadable!]
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