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Returns to scale in U.S. production: estimates and implications

  • Susanto Basu
  • John G. Fernald

A typical (roughly) two-digit industry in the United States appears to have constant or slightly decreasing returns to scale. Three puzzles emerge, however. First, estimates tend to rise at higher levels of aggregation. Second, estimates of decreasing returns in many industries contradict evidence of only small economic profits. Third, estimates using value added differ substantially from those using gross output, and appear less robust. These puzzles are inconsistent with a representative firm paradigm, but are consistent with simple stories of aggregation over heterogeneous units. We discuss implications of this heterogeneity for recent models of imperfect competition in macroeconomics.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 546.

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Date of creation: 1996
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Handle: RePEc:fip:fedgif:546
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  1. Nelson, C. & Startz, R., 1988. "Some Furthere Results On The Exact Small Sample Properties Of The Instrumental Variable Estimator," Working Papers 88-06, University of Washington, Department of Economics.
  2. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
  3. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
  4. Basu, S. & Fernald, J.G., 1993. "Are Apparent Productive Spillovers a Figment of Specification Error," Papers 93-22, Michigan - Center for Research on Economic & Social Theory.
  5. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  6. Roger E.A. Farmer, 1994. "Indeterminacy and Sector-Specific Externalities," UCLA Economics Working Papers 722, UCLA Department of Economics.
  7. Mark Bils & Jang-Ok Cho, 1993. "Cyclical factor utilization," Discussion Paper / Institute for Empirical Macroeconomics 79, Federal Reserve Bank of Minneapolis.
  8. Bruno, Michael, 1984. "Raw Materials, Profits, and the Productivity Slowdown," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 1-29, February.
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