On the Estimation of Returns to Scale, Technical Progress and Monopolistic Markups

This paper derives a number of theoretical results in the context of estimating returns to scale, technical progress and monopolistic markups when there are multiple outputs and/or multiple inputs. The choice between value added versus gross output in the estimation of returns to scale is also addressed, including consideration of problems that arise in aggregation across sectors of an economy. As an illustration, we use US data on manufacturing at the aggregate, sector and industry levels, and find evidence of strong increasing returns to scale across all levels of aggregation. Technical progress is typically found to be insignificant implying that, contrary to many previous results, US economic growth has been driven by increasing returns to scale rather than technical progress. Such findings have important implications for the macroeconomic modeling of economic fluctuatio