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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Returns to Scale in U.S. Production: Estimates and Implications
Susanto Basu and John G. Fernald

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 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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Last update: July 19, 2001