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

JOURNAL OF POLITICAL ECONOMY, Vol. 105, No. 2, April 1997

Posted: 16 Apr 1997

See all articles by Susanto Basu

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

John G. Fernald

Federal Reserve Bank of San Francisco

Abstract

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 often rise at higher levels of aggregation. Second, apparent decreasing returns contradicts evidence of only 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. Theory and evidence on aggregation invalidate the common use of demand- side instruments. Finally, we discuss implications of heterogeneity for macroeconomic modeling: A one-sector macroeconomic model that ignores heterogeneity may sometimes require firm-level parameters, but at other times the model may require the "biased" aggregate parameters.

JEL Classification: E23, E32, L11, L16

Suggested Citation

Basu, Susanto and Fernald, John G., Returns to Scale in U.S. Production: Estimates and Implications. JOURNAL OF POLITICAL ECONOMY, Vol. 105, No. 2, April 1997. Available at SSRN: https://ssrn.com/abstract=3919

Susanto Basu (Contact Author)

Boston College, College of Arts and Sciences, Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3806
United States
617-552-2308 (Fax)

National Bureau of Economic Research (NBER) ( email )

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John G. Fernald

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-2135 (Phone)

HOME PAGE: http://www.frbsf.org/economics/economists/jfernald.html

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