Testing Profit Rate Equalization in the U.S. Manufacturing Sector: 1947-1998

Jerome Levy Economics Institute Working Paper No. 321

45 Pages Posted: 27 Mar 2001

See all articles by Ajit Zacharias

Ajit Zacharias

Bard College - Levy Economics Institute

Date Written: February 2001

Abstract

Long-run differentials in interindustrial profitability are relevant for several areas of theoretical and applied economics because they characterize the overall nature of competition in a capitalist economy. This paper argues that the existing empirical models of competition in the industrial organization literature suffer from serious flaws. An alternative framework, based on recent advances in the econometric modeling of the long run, is developed for estimating the size of long-run profit rate differentials. It is shown that this framework generates separate, industry-specific estimates of two potential components of long-run profit rate differentials identified in economic theory. One component, the noncompetitive differential, stems from factors that do not depend directly on the state of competition; these factors are generally characterized as risk and other premia. The other component, the competitive differential, is due to factors that depend directly on the state of competition (factors such as degree of concentration and economies of scale). Estimates provided here show that during the period under study, the group of industries with statistically insignificant competitive differentials accounted for 72 percent of manufacturing profits and 75 percent of manufacturing capital stock, which is interpreted as lending support to the theories of competition advanced by the classical economists and their modern followers.

Suggested Citation

Zacharias, Ajit, Testing Profit Rate Equalization in the U.S. Manufacturing Sector: 1947-1998 (February 2001). Jerome Levy Economics Institute Working Paper No. 321. Available at SSRN: https://ssrn.com/abstract=259844 or http://dx.doi.org/10.2139/ssrn.259844

Ajit Zacharias (Contact Author)

Bard College - Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504
United States
845-758-7734 (Phone)
845-758-1149 (Fax)

HOME PAGE: http://www.levy.org

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