Returns to Scale, Productivity and Competition: Empirical Evidence from U.S. Manufacturing and Construction Establishments

39 Pages Posted: 12 Feb 2016 Last revised: 2 May 2017

See all articles by Wei Gao

Wei Gao

University of Texas at Austin

Matthias Kehrig

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: May 1, 2017

Abstract

We build a model of firm entry and exit and show how returns to scale shape firm survival, the equilibrium productivity and size distributions and firm concentration. High productivity dispersion and high concentration ratios need not reflect inefficiencies when returns to scale are strongly decreasing. We apply a broad set of structural and reduced-form estimation techniques to establishment-level data from the U.S. Census of Construction and Manufacturing to assess returns to scale and productivity dispersion across establishments. Indeed, industries with lower returns to scale are characterized by higher productivity dispersion and lower concentration ratios as predicted in the model. Returns to scale are 0.96 on average, but range from 0.86 in Non-metallic Minerals to 1.3 in Semiconductors. Returns to scale tend to be highest in durable manufacturing, medium in non-durable manufacturing and lowest in the production of housing. An economy characterized by such differences in its sectoral production structure will exhibit long-run structural change away from construction and non-durable manufacturing, as in the data, and endogenously replicate the cyclical behavior of relative prices in the U.S.: relative durable prices are counter-cyclical while relative housing prices are pro-cyclical.

Keywords: returns to scale, production functions, productivity dispersion, sectoral change

JEL Classification: E2, L1, L2, L6, L7

Suggested Citation

Gao, Wei and Kehrig, Matthias, Returns to Scale, Productivity and Competition: Empirical Evidence from U.S. Manufacturing and Construction Establishments (May 1, 2017). Available at SSRN: https://ssrn.com/abstract=2731596 or http://dx.doi.org/10.2139/ssrn.2731596

Wei Gao

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Matthias Kehrig (Contact Author)

Duke University ( email )

237 Social Sciences
Box 90097
Durham, NC 27708-0097
United States

HOME PAGE: http://sites.google.com/site/matthiaskehrig/research

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
181
Abstract Views
837
rank
199,554
PlumX Metrics