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Testing for Constant Returns to Scale and Perfect Competition in the Israeli Economy, 1980-2006


  • Joseph Djivre

    () (Bank of Israel)

  • Yigal Menashe

    () (Bank of Israel)


In this paper we test the hypothesis of constant returns to scale and no market power, implementing Hall's test (1988, 1991) on Israeli annual real business-sector GDP data. The results validate the hypothesis of perfect competition at the aggregate level. Thus on the one hand they justify the imposition of the CRS restriction when estimating the business-sector GDP production function in Israel and on the other, they contradict the assumption of CRS with market power and fixed entry costs in the modeling of the Israeli economy.

Suggested Citation

  • Joseph Djivre & Yigal Menashe, 2009. "Testing for Constant Returns to Scale and Perfect Competition in the Israeli Economy, 1980-2006," Bank of Israel Working Papers 2009.07, Bank of Israel.
  • Handle: RePEc:boi:wpaper:2009.07

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    File Function: First version, 2009
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    More about this item


    returns to scale; market power; TFP; Solow residual; capacity utilization;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure


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