Production function regressions, returns to scale, and externalities
Abstract
A number of recent papers have used simple linear regressions in an attempt to identify
market structure, the extent of returns to scale, and possible external effects in
U.S. manufacturing industries. The results obtained from these regressions have important
implications for several branches of modern macroeconomics. As a result, the macro
literature frequently cites specific numerical evidence from Caballero and Lyons (1992)
and Hall (1990), which suggests that there are quantitatively significant increasing
returns to scale, or external effects in U.S. manufacturing. In contrast, it is the
argument of this paper that this evidence is not convincing. The most robust evidence
suggests that the typical U.S. manufacturing industry displays constant returns with
no external effects. On the other hand, there is significant heterogeneity across
industries.
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