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Scale effects found!


  • Timothy Ford
  • Bruce Elmslie


A key feature of early endogenous growth models is their prediction of scale effects - the larger the economy, as measured by population, the number of firms or employment, the faster the economy should grow. However, empirical work has failed to support the existence of scale effects. As a result, much human capital has been expended in order to 'fix' this problem by eliminating scale effects in endogenous growth models. We contend that econometric techniques used in the empirical search for scale effects are inconsistent with growth theory. Using data from US states and an econometric technique that better matches growth theory by allowing each economy to have its own steady state, we provide empirical support for the existence of scale effects. Results call into question the need to reformulate the first models of endogenous growth.

Suggested Citation

  • Timothy Ford & Bruce Elmslie, 2011. "Scale effects found!," Applied Economics, Taylor & Francis Journals, vol. 43(26), pages 3883-3890.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:26:p:3883-3890
    DOI: 10.1080/00036841003742553

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    References listed on IDEAS

    1. Bai, Jushan, 1999. "Likelihood ratio tests for multiple structural changes," Journal of Econometrics, Elsevier, vol. 91(2), pages 299-323, August.
    2. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139.
    3. Ahrens, W. Ashley & Sharma, Vijaya R., 1997. "Trends in Natural Resource Commodity Prices: Deterministic or Stochastic?," Journal of Environmental Economics and Management, Elsevier, vol. 33(1), pages 59-74, May.
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