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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