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Returns to Scale and Externalities in the Consumption and Investment Sectors


  • Sharon G. Harrison

    (Barnard College, Columbia University)


Using data on US manufacturing, I estimate internal returns to scale and external effects for the consumption and investment sectors. I construct panels of data at the industry level and use results of gross output production function estimation to derive implied estimates in a value added specification. For the investment sector, returns to scale appear to be slightly increasing, with evidence of a positive external effect. For consumption, the evidence indicates decreasing to constant returns to scale. I discuss the implications of these results for the empirical plausibility of indeterminacy in recent multi-sector models of the business cycle. (Copyright: Elsevier)

Suggested Citation

  • Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
  • Handle: RePEc:red:issued:v:6:y:2003:i:4:p:963-976
    DOI: 10.1016/S1094-2025(03)00034-6

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    References listed on IDEAS

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    2. Levon Barseghyan & Riccardo DiCecio, 2006. "Heterogeneous firms, productivity and poverty traps," Working Papers 2005-068, Federal Reserve Bank of St. Louis.
    3. Takayuki Tsuruga, 2004. "Hump-shaped Behavior of Inflation and Dynamic Externality," Econometric Society 2004 Far Eastern Meetings 614, Econometric Society.
    4. Lloyd-Braga, Teresa & Modesto, Leonor & Seegmuller, Thomas, 2014. "Market distortions and local indeterminacy: A general approach," Journal of Economic Theory, Elsevier, vol. 151(C), pages 216-247.
    5. Felbermayr Gabriel J & Licandro Omar, 2005. "The Underestimated Virtues of the Two-sector AK Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-19, September.
    6. Driver, Ciaran & Temple, Paul & Urga, Giovanni, 2006. "Identifying externalities in UK manufacturing using direct estimation of an average cost function," Economics Letters, Elsevier, vol. 92(2), pages 228-233, August.
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    8. Juin-Jen Chang & Jang-Ting Guo & Jhy-Yuan Shieh & Wei-Neng Wang, 2015. "Sectoral Composition Of Government Spending And Macroeconomic (In)Stability," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 23-33, January.
    9. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    10. Hu, Yunfang & Mino, Kazuo, 2013. "Trade structure and belief-driven fluctuations in a global economy," Journal of International Economics, Elsevier, vol. 90(2), pages 414-424.
    11. Frédéric Dufourt & Kazuo Nishimura & Alain Venditti, 2016. "Sunspot fluctuations in two-sector models: New results with additively separable preferences," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(1), pages 67-83, March.
    12. Barseghyan, Levon & DiCecio, Riccardo, 2016. "Externalities, endogenous productivity, and poverty traps," European Economic Review, Elsevier, vol. 85(C), pages 112-126.
    13. Bonatti, Luigi & Felice, Giulia, 2008. "Endogenous growth and changing sectoral composition in advanced economies," Structural Change and Economic Dynamics, Elsevier, vol. 19(2), pages 109-131, June.
    14. Zhang Wei-Bin, 2014. "Land Value and Rent Dynamics in an Integrated Walrasian General Equilibrium and Neoclassical Growth Theory," Scientific Annals of Economics and Business, De Gruyter Open, vol. 61(2), pages 235-258, December.
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    16. Zhang W.B., 2015. "Birth And Mortality Rates, Gender Division Of Labor, And Time Distribution In The Solow Growth Model," Revista Galega de Economía, University of Santiago de Compostela. Faculty of Economics and Business., vol. 24(1), pages 121-134.
    17. Dufourt, Frédéric & Nishimura, Kazuo & Venditti, Alain, 2015. "Indeterminacy and sunspots in two-sector RBC models with generalized no-income-effect preferences," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1056-1080.
    18. Yunfang Hu & Kazuo Mino, 2011. "Globalization and Volatility under Alternative Trade Structures," KIER Working Papers 791, Kyoto University, Institute of Economic Research.
    19. Jang-Ting Guo & Juin-Jen Chang & Jhy-Yuan Shieh & Wei-Neng Wang, 2017. "Sectoral Composition of Government Spending, Distortionary Income Taxation, and Macroeconomic (In)stabilit," Working Papers 201702, University of California at Riverside, Department of Economics.
    20. Herrendorf, Berthold & Valentinyi, Akos, 2006. "On the stability of the two-sector neoclassical growth model with externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1339-1361, August.
    21. Max Floetotto & Nir Jaimovich & Seth Pruitt, 2009. "Markup variation and endogenous fluctuations in the price of investment goods," International Finance Discussion Papers 968, Board of Governors of the Federal Reserve System (U.S.).
    22. Meng, Qinglai & Yip, Chong Kee, 2008. "On indeterminacy in one-sector models of the business cycle with factor-generated externalities," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 97-110, March.
    23. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
    24. Stockman, David R., 2009. "Chaos and sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 2030-2046, December.
    25. McGough, Bruce & Meng, Qinglai & Xue, Jianpo, 2013. "Expectational stability of sunspot equilibria in non-convex economies," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1126-1141.

    More about this item


    Production function; Sector-specific externalities; Increasing returns to scale;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles


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