Verdoorn's law and increasing returns to scale: country estimates based on the cointegration approach

Abstract

The Johansen approach to estimating long-run cointegration vectors is used with the Penn World Tables data to estimate returns to scale. Thus, this approach has the advantages of including a measure of capital, it overcomes the simultaneity problems associated with the single-equation Verdoorn law, and it involves estimating a correctly specified dynamic model in which is embedded the long-run solution(s). The results indicate that there is substantial evidence that increasing returns are the norm for the majority of countries.