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Returns to Scale in U.S. Production: Estimates and Implications

  • Basu, Susanto
  • Fernald, John G

A typical two-digit industry in the United States appears to have approximately constant returns to scale. Three puzzles emerge, however. First, estimates rise at higher levels of aggregation. Second, apparent decreasing returns contradicts evidence of small economic profits. Third, estimates with value added differ substantially from those with gross output. A representative-firm paradigm cannot explain these puzzles but a simple story of aggregation over heterogeneous units can. The authors discuss implications of heterogeneity for calibrating one-sector macroeconomic models, showing that these models sometimes require firm-level parameters but at other times require the 'biased' aggregate parameters. Copyright 1997 by the University of Chicago.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 105 (1997)
Issue (Month): 2 (April)
Pages: 249-83

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Handle: RePEc:ucp:jpolec:v:105:y:1997:i:2:p:249-83
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  1. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  2. Benhabib, Jess & Farmer, Roger E.A., 1995. "Indeterminacy and Sector-Specific Externalities," Working Papers 95-02, C.V. Starr Center for Applied Economics, New York University.
  3. Bruno, Michael, 1984. "Raw Materials, Profits, and the Productivity Slowdown," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 1-29, February.
  4. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  5. Nelson, Charles R & Startz, Richard, 1990. "Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator," Econometrica, Econometric Society, vol. 58(4), pages 967-76, July.
  6. Mark Bils & Jang-Ok Cho, 1993. "Cyclical factor utilization," Discussion Paper / Institute for Empirical Macroeconomics 79, Federal Reserve Bank of Minneapolis.
  7. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  8. Basu, Susanto & Fernald, John G., 1995. "Are apparent productive spillovers a figment of specification error?," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 165-188, August.
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