Scale effects, time-varying markups, and the cyclical behaviour of primal and dual productivity

Abstract

This paper presents estimates of the degree of returns to scale using nonparametric measures of primal and dual productivity for 2-digit US manufacturing industries. As part of the analysis, the cyclical behaviour of primal and dual productivity measures are considered, time-varying markups are allowed for, and the small sample properties of the instrumental variables estimator used to derive the estimates from the primal and dual relations examined. Both the primal and dual estimates indicate the existence of increasing returns to scale for the durable goods industries. The simulation results indicate there is a slight tendency for the dual equation estimates to overestimate the degree of returns to scale. However, small sample bias appears to be most severe for the non-durable goods industries.