Working Paper: NBER ID: w3033
Authors: Ricardo J. Caballero; Richard K. Lyons
Abstract: This paper develops a method for joint estimation of both the degree of internal returns to scale and the extent of external economies. We apply the method in estimating returns to scale indexes for U.S. manufacturing industries at the two-digit level. Overall, we find that only three of the twenty industry categories show any evidence of internal increasing returns: (1) Primary Metals, (2) Electrical Machinery, and (3) Paper Products. More striking, however, is the very strong evidence of the existence of external economies, where external is defined as external to a given two-digit \nindustry and internal to the U.S.. According to our preferred estimates, if all manufacturing industries simultaneously raise their inputs by 10%, aggregate manufacturing production rises by 13%, of which about 5% is due to external economies. Thus, when an industry increases its inputs in isolation by 10%, its output rises by no more than 8%.
Keywords: external economies; internal returns to scale; manufacturing
JEL Codes: L11; L52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| input increases in manufacturing industries (L60) | aggregate manufacturing production (E23) |
| external economies (F69) | aggregate manufacturing production (E23) |
| individual industry input increases (L69) | individual industry output (L69) |
| external economies (F69) | individual industry output (L69) |
| output of an industry (L69) | output levels of other manufacturing industries (L69) |