Working Paper: NBER ID: w3034
Authors: Robert E. Hall
Abstract: In 1957, Robert Solow published a paper that provided the theoretical foundation for almost all subsequent work on productivity measurement. Although most applications of Solow's method have measured trends over fairly long time periods, the method also has important uses at higher frequencies. Under constant returns to scale and competition, the Solow residual measures the pure shift of the production function. Shifts in product demand and factor supplies should have no effect on the residual. Tests of this invariance property show that it fails in a great many industries. Though other explanations may deserve some weight, it appears that the leading cause of the failure of invariance is increasing returns and market power. The empirical findings give some support to the theory of monopolistic competition.
Keywords: Solow residual; productivity measurement; market power; increasing returns
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing returns and market power (D43) | failure of invariance property of Solow residual (O41) |
| mismeasurement of inputs and outputs (D20) | failure of invariance property of Solow residual (O41) |
| cyclical behavior of Solow residual should vanish under constant returns to scale (O40) | cyclical behavior of modified Solow residual (E32) |
| variables that do not shift production function (D24) | Solow residual (O41) |
| government purchases as an exogenous variable (H59) | correlation with Solow residual (C29) |