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