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Testing Profit Rate Equalization in the U.S. Manufacturing

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  • Ajit Zacharias

    (Jerome Levy Economics Institute)

Abstract

Long-run differentials in interindustrial profitability are relevant for several areas of theoretical and applied economics because they characterize the overall nature of competition in a capitalist economy. This paper argues that the existing empirical models of competition in the industrial organization literature suffer from serious flaws. An alternative framework, based on recent advances in the econometric modeling of the long run, is developed for estimating the size of long- run profit rate differentials. It is shown that this framework generates separate, industry-specific estimates of two potential components of long-run profit rate differentials identified in economic theory. One component, the noncompetitive differential, stems from factors that do not depend directly on the state of competition; these factors are generally characterized as risk and other premia. The other component, the competitive differential, is due to factors that depend directly on the state of competition (factors such as degree of concentration and economies of scale). Estimates provided here show that during the period under study, the group of industries with statistically insignificant competitive differentials accounted for 72 percent of manufacturing profits and 75 percent of manufacturing capital stock, which is interpreted as lending support to the theories of competition advanced by the classical economists and their modern followers.

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File URL: http://128.118.178.162/eps/mac/papers/0012/0012013.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0012013.

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Length: 44 pages
Date of creation: 12 Feb 2001
Date of revision:
Handle: RePEc:wpa:wuwpma:0012013

Note: Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 44; figures: included
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Web page: http://128.118.178.162

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  1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  3. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
  4. Pesaran, M. Hashem & Shin, Yongcheol, 1996. "Cointegration and speed of convergence to equilibrium," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 117-143.
  5. Clifton, James A, 1977. "Competition and the Evolution of the Capitalist Mode of Production," Cambridge Journal of Economics, Oxford University Press, vol. 1(2), pages 137-51, June.
  6. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
  7. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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Cited by:
  1. Andrea Vaona, 2011. "Further econometric evidence on the gravitation and convergence of industrial rates of return on regulating capital," Working Papers 08/2011, University of Verona, Department of Economics.

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