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The Inconsistency of Common Scale Estimators when Output Prices are unobserved and Endogenous

  • Klette, T.J.

This paper explores the inconsistency of common scale estimators when output is proxied by deflated sales, based on a common output deflator across firms. The problems arise when firms operate in an imperfectly competitive environment and prices differ between firms. In particular, we show that the scale estimates will tend to be downward biased in the production function case, under a wide range of assumptions about the pattern of technology, demand and factor price shocks. The result also holds for scale estimates obtained from cost functions. The empirical part of the paper presents various estimates of scale economies for a sample of Norwegian manufacturing plants. The findings provide some support for the hypothesis that the firms face an imperfectly competitive environment. The estimates suggests that there are significant markups and scale economies to the variable factors of production in our sample. However, the estimates of markups and scale economies presented in this paper are substantially lower than the results obtained by Hall (1988, 1990) and others using industry level data.

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Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1586.

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Length: 39 pages
Date of creation: 1992
Date of revision:
Handle: RePEc:fth:harver:1586
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  1. Caballero, R.J. & Lyons, R.K., 1991. "Some Evidence of Productivity Linkages in Manufacturing," Papers fb-27, Columbia - Graduate School of Business.
  2. Zvi Griliches & Jerry A. Hausman, 1984. "Errors in Variables in Panel Data," NBER Technical Working Papers 0037, National Bureau of Economic Research, Inc.
  3. Ringstad, Vidar, 1974. "Some Empirical Evidence on the Decreasing Scale Elasticity," Econometrica, Econometric Society, vol. 42(1), pages 87-101, January.
  4. Paul Krugman, 1986. "Industrial Organization and International Trade," NBER Working Papers 1957, National Bureau of Economic Research, Inc.
  5. Bartelsman, E.J. & Caballero, R.J. & Lyons, R.K., 1991. "Short and Long Run Externalities," Papers 91-18, Columbia - Graduate School of Business.
  6. N. Gregory Mankiw, 1990. "A Quick Refresher Course in Macroeconomics," NBER Working Papers 3256, National Bureau of Economic Research, Inc.
  7. Eden, B. & Griliches, Z., 1991. "Prodoctivity, Market Power and Capacity Utilization when Spot Market Are Complete," Working Papers 91-06, University of Iowa, Department of Economics.
  8. Shapiro, Matthew D, 1987. "Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?," American Economic Review, American Economic Association, vol. 77(2), pages 118-24, May.
  9. Jacques Mairesse & Zvi Griliches, 1988. "Heterogeneity in Panel Data: Are There Stable Production Functions?," NBER Working Papers 2619, National Bureau of Economic Research, Inc.
  10. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
  11. Zvi Griliches & Jacques Mairesse, 1981. "Productivity and R and D at the Firm Level," NBER Working Papers 0826, National Bureau of Economic Research, Inc.
  12. 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.
  13. Caleb A. Smith, 1955. "Survey of the Empirical Evidence on Economies of Scale," NBER Chapters, in: Business Concentration and Price Policy, pages 213-238 National Bureau of Economic Research, Inc.
  14. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
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