Increasing Returns to Scale

The current geological epoch has been dubbed the Anthropocene-the age of humans. We argue that the roots of the Anthropocene lie in the agricultural revolution that began some 8000 years ago. Unique human psychological and cultural characteristics were present in our distant hunter-gatherer past, but in terms of the biophysical impact of our species, agricultural represented an unequivocal and decisive evolutionary break. With the transition to agriculture human society began to function as a superorganism functioning as a single unit designed by social natural selection to produce economic surplus. Where environmental conditions were permitted, early human agricultural societies followed the same pattern as a few social insects and exhibited explosive population growth, complex and detailed division of labor, intensive resource exploitation, territorial expansion, and a social organization favoring the survival and growth of the supergroup over the well-being of individuals within the group. Similar economic forces lie behind ultrasociality in social insects and humans-increased productivity from the division of labor, increasing returns to scale, and the exploitation of stocks of productive resources. Exploring the evolutionary mechanisms behind ultrasociality offers insights into the growth imperative that threatens the stability of the earth's life support systems.

Empirical evidence documents a discernible negative relationship between government size, as measured by income tax rates and the output share of government purchases, and the magnitude of macroeconomic fluctuations in OECD countries since 1960. This implies that both taxes and public spending seem to be effectively working as "automatic stabilizers". In this paper, we examine the effects of income taxes and government consumption on output variability in several versions of infinite-horizon representative agent (real business cycle, RBC) models with equilibrium determinacy and exogenous productivity shocks. In particular, we allow for either one or two sectors of production, either a constant or increasing returns-to-scale technology, and two different formulations of the household utility function. We also incorporate debt-financed borrowing by the government into the analysis. As Gali (1994, European Economic Review) has shown, in the one-sector RBC model with constant ...

We study a simple model of factor saving technological innovation in a concave framework. Capital can be used either to reproduce itself or, at additional cost, to produce a higher quality of capital that requires less labor input. If higher quality capital can be produced quickly, we get a model of exogenous balanced growth as a special case. If, however, higher quality capital can be produced slowly, we get a model of endogenous growth in which the growth rate of the economy and the rate of adoption of new technologies are determined by preferences, technology, and initial conditions. Moreover, in the latter case, the process of growth is necessarily uneven, exhibiting a natural cycle with alternating periods of high and low growth. Growth paths and technological innovations also exhibit dependence upon initial conditions. The model provides a step toward a theory of endogenous innovation under conditions of perfect competition.

This paper reviews the new economic geography literature, which accounts for the uneven distribution of economic activity across space in terms of a combination of love of variety preferences, increasing returns to scale and transport costs. After outlining the canonical core and periphery model, the paper examines the empirical evidence on three of its central predictions: the role of market access in determining factor prices, the related home market effect in which demand has a more than proportionate effect on production, and the potential existence of multiple equilibria. In reviewing the evidence, we highlight issues of measurement and identification, alternative potential explanations, and remaining areas for further research.

Recently, the 'new economic geography' literature has developed as a theory of the emergence of large agglomerations which relies on increasing returns to scale and transportation costs. This literature builds on diverse intellectual traditions. It combines the insights of traditional regional science with those of modern trade theory and thus attempts to provide an integrative approach to interregional and international

Data Envelopment Analysis (DEA) approach used to estimate technical efficiency and followed by regressing the technical efficiency scores to farm specific characters under tobit regression model. Primary data was collected from random samples of 240 (120 from each) coffee famers. Mean technical efficiency score was 0.89 and 0.83 in organic and conventional coffee farming respectively. Farms operating under CRS, DRS and IRS were 31.67, 3.83 and 37.5% respectively in organic coffee and 29.17, 25 and 45.83% respectively in conventional farming areas. Tobit regression showed the variation in technical efficiency was related education, farm experience and training/extension services and excess to credit.

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The standard view is that situations where no transborder environmental externalities occur are most efficiently dealt with by national environmental policies rather than by international cooperation. Though this may be the general case, non-coordinated national policies do not always produce the most efficient international allocation. This paper presents four cases in which the allocative outcome of non-coordinated domestic policy choices can be improved upon by international environmental cooperation. The first case refers to the use of environmental policy as a strategic trade instrument. The other cases refer to the existence of discrete technologies, setup costs and increasing returns to scale. The form of international environmental cooperation should be adapted to the situation. Formal international agreements between countries are characterised by high transaction costs and may not always be the most efficient form of cooperation .

In this paper, a parametric cost frontier for the credit card market is specified ("stochastic frontier approach" - SFA) and robustness checks of the main results are performed. The aim is to provide some clues to: the x-inefficiency problem; the main technical characteristics of the ...

Based on the 'endogenous' growth theory, the paper examines the effect of trade liberalization on long-run income per capita and economic growth in Turkey. Although the presumption must be that free trade has a beneficial effect on long run growth, counter examples can also be found. This controversy increases the importance of empirical work in this area. We have included the most recent data and employed multivariate cointegration analysis to test the long run relationship among the variables in hand. In a multivariate context, the effect of determinants such as increasing returrns to scale, investment in human and physical capital are also included in both theoretical and empirical works. Our causality evidence between the long run growth and a number of indicators of trade liberalizations confirms the anticipations of the 'new growth theory'. However, the overall effect of the possible breaks and/or policy change and unsustainability in the 1990s looks conradictory and deserves further investigation.

We introduce mild increasing returns-to-scale into a version of the Real Business Cycle model. These increasing returns-to-scale occur as a consequence of sector-specific externalities, that is externalities where the output of the consumption and investment sectors have external effects on the output of firms within their own sector. Keeping the production technologies for both sectors identical for expositional simplicity, we show that indeterminacy can easily occur for parameter values typically used in the real business cycle literature, and in contrast to some earlier literature on indeterminacies, for externalities mild enough so that labor demand curves are downward-sloping.

The purpose of this paper is to characterize the possibility of indeterminacy in multisector growth models that exhibit constant marginal returns to scale at the social level, with empirically realistic small external effects. Our results demonstrate that indeterminacy does not require increasing returns to scale, large external effects, or close to linear utility functions. A small divergence between the social and private returns is sufficient for multiple equilibria.

Durusu (Terkos) Gölü Balıkçı İşletmelerinin Karlılık ve Verimlilik Analizi. Bu araştırma, Durusu Gölü balıkçı işletmelerinde kullanılan üretim faktörlerinin dağılımlarını ve kaynak kullanım etkinliğini tespit etmek, optimum kaynak kullanımını sağlayarak karlılık ve verimliliği yükseltmek için alınabilecek önlemleri belirlemek amacıyla yapılmıştır. Çalışmanın materyalini gölde tüm balıkçı işletmelerinden (23 adet) 2006-2007 yılları arasında anket yoluyla elde edilen veriler oluşturmaktadır. Balıkçı işletmelerinin değerlendirilmesinde Cobb-Douglas üretim fonksiyonu kullanılmıştır. Yapılan çoklu regresyon analizi sonucuna gore balıkçı işletmelerinde ölçeğe göre artan verim tespit edilmiştir. Girdilerin marjinal verimliliği işçilikte 2.15 TL, kumanya-1.62 TL, yakıt 1.81 TL, bakım-onarım 1.16 TL, sermaye amortismanı 2.73 TL ve diğer masraflar 2.88 TL olarak belirlenmiştir. İşletmelerin verimlilik değerleri gerçek ve tahmini üretim değerleri kullanılarak hesaplanmış ve ortalama verimlilik 102.48 olarak belirlenmiştir. İşletmelerin karlılık oranları hesaplanmış ve ortalama karlılık 1.50 olarak belirlenmiştir.

We estimate the euro effect on Irish export patterns using a panel of industry data over the period 1993-2004. Our innovation is to account for country and industry specific omitted trending variables bias. We find that the euro effect on Irish exports to the euro area countries relative to the rest of the trading partners of Ireland has been positive, significant and increasing since 2000. Furthermore, we find heterogeneous euro effects across industries. We find consistent significant positive euro effects for industries characterised by increasing returns to scale.

We provide an empirically plausible endogenous growth model to prove analyti- cally that sometimes a progressive redistribution from rich to poor lowers the growth rate of consumption per capita in all subsequent periods. The model accommodates the growth retarding effect of income inequality by combining the assumptions of no credit market and a production technology with diminishing returns to the com- bined inputs of physical and human capital. Also, to make the model's assumptions consistent with the evidence reported by leading labor economists, we assume that the parental human capital sufciently improves the effectiveness of expenditure on a child's education, in order to induce increasing returns to scale in the education technology. A reduction in the progressivity of redistribution, under such educa- tion technology, enhances the average human capital of all future cohorts of parents, which in turn boosts the growth rate of average human capital. The immediate re...

There is a huge literature regarding the main determinants and sources of economic growth. Most of the recent work emphasizes on the role of knowledge, and innovation activities typically produced by a specific sector of the economy, and furthermore in the role of entrepreneurship and analysing the implications and the importance for economic growth. Moreover, the socio-economic and public policies aimi to distinguish the determining factors of growth, in order to enhance the regional cohesion and the convergence process. Much of the recent work on regional growth can be viewed as refining the basic economic insights of economic geography. There are two principal theories of why growth rates are differ, the first is the theory of comparative advantage and the second is the theory of increasing returns to scale. This paper attempts to examine the main sources of regional growth through an inter-and intra sectoral analysis. In particular, the paper attempts to investigate through an e...

This paper is in the spirit of Marshall (1920), who raised the question of how economic distance affects a firm's productivity, focusing upon the role of idea sharing in relation to technological knowledge or information between firms. In order to quantify the degree of knowledge spillover or information sharing, we take the production function approach. Assuming core-periphery structure around automobile assemblies surrounded with auto-parts suppliers, we estimate plant-level production functions of the Japanese auto-parts suppliers, where productivity function depends upon the degree of information sharing measured by both geographic plant location and membership of technological cooperation associations. We take econometric issues of cross-sectional dependence of productivity and a simultaneity problem between inputs, applying methods to the standard OLS and GMM estimators. Positive technological externalities are seen in general and for independent plants, the fact which is ...

This paper discusses the importance of manufacturing industry for the growth trajectories of developing countries from a Kaldorian perspective, with particular emphasis on the case of Latin America. After three decades of expressive growth rates in the postwar period, the region has experienced twenty years of very low growth. Most of the countries in the region have since the late eighties undertaken important processes of trade and financial liberalization, but this has not yet been effective in delivering the high growth rates observed in the "golden age". This essay intends to address the growth performance of Latin America during the period of reforms by discussing and testing Kaldor's first and second "growth laws". The first law states that "manufacturing is the engine of growth", whereas the second law (also known as Verdoorn's Law) asserts that there is a positive causal relationship between output and labor productivity in manufacturing, derived from static and dynamic increasing returns to scale. This paper provides estimations of the first and second of Kaldor's laws using panel data for a sample of the seven largest economies in Latin America during the period 1985-2001. Our estimation results appear to support Kaldor's views on the importance of manufacturing industry for economic growth.

The Korean housebuilding industry has been subject to structural changes since the 1980s. One of the key features is that housebuilding firms have become diversified into a range of businesses and as a result display multi-product structure. This paper examines the efficiency of the multi-product structure of Korean housebuilding firms. For the analysis, translog cost functions were estimated using data for 201 building firms for the 3 years 1993-1995. The empirical results indicate that medium-size building firms enjoy increasing returns to scale, whereas large firms experience constant returns to scale. Korean building firms exhibit significant economies of scope in their diversification activities. Large firms have the greatest economies of scope. These results are consistent with cost efficiency for the multi-product structure of Korean housebuilding firms. The estimated optimum scale suggests that many large firms should expand only through diversification.

This paper demonstrates several strengths and shortcomings of models of sectoral reallocation. Although these models demonstrate that sectoral reallocation can bean important amplication and propagation mechanism for exogenous shocks, they are essentially unable to explain any eects of sectoral reallocation on aggregate productivity or related quantities (such as the real wage or observations of aggregate increasing returns to scale), unless a wedge is introduced into the model that drives the marginal products of inputs in dierent sectors apart in steady state. In particular, costs of adjustment, lags to adjustment, and intermediate input linkages are not sucient. This paper oers a solution to this shortcoming in the form of variable sectoral capital utilization, the marginal product of which can easily dier across sectors in steady state. Reallocations of production between sectors in this setting are then shown to have rst-order eects on aggregate productivity and real wages, and can explain the procyclicality of these variables without reliance on large, exogenous, and persistent shocks to technology.

This paper studies the inßuence of different modelling assumptions on the stability of the steady state in one-sector models of economic growth with externalities in the production function. We start with a standard Benhabib&Farmer 1994 one-sector model and study the combined effect on the stability of variable capital utilization, progressive taxation, and productive public spending subject to congestion. As was shown earlier by Wen 1998, variable capacity utilization leads to indeterminacy or absolute instability for low degrees of social increasing returns to scale. Introduction of productive public spending further lowers the degree of IRS necessary to break saddle-path stability of the steady state. The degree of progressivity of the tax schedule inßuences only the indeterminate and absolute unstable regions in the space spanned by externality parameters. More progressive tax schedule increases the area of indeterminacy at the expense of the absolute instablity region. We perform calibration of the model to the tax regimes observed in the USA.

We show that a one-sector real business cycle model with mild increasing returns-to-scale, variable capital utilization and saddle-path stability is able to produce qualitatively realistic business cycles driven solely by disturbances to government purchases. Due to an endogenous increase in labor productivity, a positive spending shock can lead to simul-taneous increases in output, consumption, investment, employment and real wage. Our analysis illustrates a close relationship between this result and the recent literature that explores indeterminacy and sunspots in real business cycle models under laissez-faire. In particular, the condition which governs the required magnitude of increasing returns for government spending shocks to generate procyclical macroeconomic effects is identical to that necessary for a laissez-faire one-sector real business cycle model to exhibit local inde-terminacy.

The main objectives of this paper are to measure the relative efficiency of Argentinean airports, and to infer possible regulatory consequences of the results. We pay attention to regional differences that could help the regulator in its task. At the same time, we try to determine which “environmental” variables (in the sense of particular conditions which are specific to different sets of airports) affect the relative efficiency of different airports. Since 1997, most of the airports were privatized, by means of concessions contracts. Of the DEA analysis we derive two broad conclusions. Firstly, significant differences in efficiency are prevalent in Argentinean airports. Secondly, best-practice calculations indicate that much of the Argentinean airports operate at a high level of efficiency during the period. Therefore, the overall conclusion is that Argentinean airports are mixed managed during the period as far as technical efficiency is concerned. Moreover, dimension makes a dif...

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual°uctuations that standard RBC models predict fairly well, but also aspects of actual°uctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output (Cogley and Nason, AER, 1995); the large forecastable movements and comovements of output, consumption and hours (Rotemberg and Woodford, AER, 1996); and the fact that consumption appears to lead output and investment over the business cycle. Indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale.

This paper goes beyond orthodox considerations of direct payment e®ects on agricultural output, by highlighting the role of subsidies in a®ecting individual producers' ability to cover¯xed costs, and in distorting the volume of aggregate production and net trade by implicitly discouraging exits. The theoretical model considers both taxpayer and consumer¯nanced decoupled direct payment schemes and compares them to a coupled production subsidy. In terms of possible producer responses to direct payments, we propose an analytical framework of production decision-making in the presence of a stochastic distribution of¯xed costs across representative farms. We show that decoupled payments in theory can have a larger e®ect on output than coupled payments. The model explicitly recognizes three consequences of domestic support: (a) induce exit or entry; (b) bias production incentives to domestic markets; and (c) cross-subsidize export in global markets. An empirical model of the U.S. wheat sector is developed to illustrate the relative potential impacts of coupled versus decoupled payments on output through the e®ects on a farmer's ability to cover¯xed costs and hence exit decisions.

What are the underlying rationales for industrial policy? Does empirical evidence support the use of industrial policy for correcting market failures that plague the process of industrialization? To address these questions, we provide a critical survey of the analytical literature on industrial policy. We also review some recent industry successes and argue that only a limited role was played by public interventions. Moreover, the recent ascendance of international industrial networks that dominate the sectors in which LDCs have in the past had considerable success, implies a further limitation on the potential role of industrial policies as traditionally understood. Overall, there appears to be little empirical support for an activist government policy even though market failures exist that can, in principle, justify the use of industrial policy.

We explore asset pricing in the context of the one-sector Benhabib-Farmer-Guo (BFG) model with increasing returns to scale in production and compare our results with …nancial implications of the standard dynamic stochastic general equilibrium (DSGE) model. Our main goal is to determine the e¤ects of local indeterminacy and the presence of sunspot shocks on asset pricing. We …nd that the BFG model does not adequately represent key stylized facts of U.S. capital markets and does not improve on the asset pricing results obtained in the standard DSGE model.

This paper describes a search model with a continuum of worker and job types, transferable utility and an increasing returns to scale contact technology. We apply a second order Taylor expansion to characterize the equilibrium. One third of the increasing returns in contacts are absorbed by firms and workers being more choosy. Hence, strongly increasing returns in contact rates are consistent with weakly increasing returns in matching. The resulting equilibrium is not efficient. Unemployment benefits can reduce the loss by serving as a search subsidy. The loss caused by search frictions is higher when worker types are bad substitutes. Numerical simulations of the model show our Taylor expansions to be quite accurate.

This paper presents a model of media competition with free entry when media operators are financed both from advertisers and viewers. The relation between advertising receipts and sales receipts, which are both complementary and antagonist, is different if media operators impose a price or a quantity to advertisers. Media operators are better off setting an advertising price than an advertising quantity. We establish a relationship between the equilibrium levels (advertising and entry) and the advertising technology. In particular, media operators do not gain by introducing advertising when they impose advertising quantities and when advertising exhibits constant returns to scale in the audience size. Under constant or increasing returns to scale in the audience size, we find an excessive level of entry and an insufficient level of advertising.

Network economic analysis provides an important and intuitive explanation of racial inequality. In short, Whiteness is Microsoft's Windows operating system, or the QWERTY keyboard, or the standard (nonmetric) measurement system, and difficult to dislodge for many of the same reasons. Network effects explain how the establishment of a dominant market standard 1) can be contingent on historical context, 2) does not necessarily derive from superior intrinsic merit, and 3) exhibits strong self-reinforcing characteristics that can maintain the dominance of the standard in perpetuity, even in the absence of any explicit or conscious determination to maintain it. All of these factors are present with regard to the economic and cultural dominance of Whiteness in the United States. Whiteness works like a network standard in three important ways: 1) increasing returns to scale arising from communication standards drive markets toward a single dominant racial standard; 2) various kinds of positive feedback in complementary markets make the dominance of the Whiteness standard sticky, or resistant to change; and 3) the establishment of Whiteness as the dominant racial standard is due to historical events rather than to any inherent or natural qualities. This insight casts new light on mainstream explanations of racial inequality, supporting the critique that: 1) current racial inequality is not the result of unequal merit, but is the legacy of history; and 2) no racist intent or conspiracy is required for this inequality to continue-rather, specific intent and determination is required to dislodge it.

Purpose – The aim of this study is to investigate the validity of the Kaldor-Verdoorn's law in explaining the long-run determinants of the labor productivity growth for the manufacturing sector of some developed economies (Western European Countries, Australia, Canada, Japan and the USA). Design/methodology/approach – The authors consider the period 1973-2006 using data provided by the European Commission – Economics and Financial Affairs. The method is instrumental variable. The robustness of estimates is checked by means of the Chow and the CUSUM and CUSUMQ tests. The authors consider the traditional specification of the dynamic Verdoorn law and the one which also includes investment to output ratio (I/Y), as a proxy of the capital growth rate, and the average labor cost growth, as a proxy of supply factors. Findings – The findings suggest that the law is valid for the manufacturing as countries show increasing returns to scale. Capital growth and labor cost growth do not appe...

Four firms dominate the international uranium enrichment market. Simultaneously, the nations that host enrichment facilities strongly discourage other nations from developing enrichment capacity, given its potential use in nuclear weapons production. Therefore, these four firms benefit from the exercise of national power to prevent entry into this market. This paper shows that these firms also benefit from increasing returns to scale. In similar national situations, this industry would be regulated or nationalized. This is because free markets do not necessarily lead to a socially optimal long-run equilibrium where the industry is necessarily concentrated, such that there is no proliferating entry, but is sufficiently diverse, so that no one national group can dictate prices, contract terms, or non-proliferation policy. Therefore, some form of international regulation might be necessary to discourage enrichment technology proliferation and assure enrichment supply at reasonable prices.

This paper demonstrates how fiscal policy rules can be designed to eliminate all forms of endogenous fluctuations in a one-sector growth model with increasing returns-to-scale. When the policy rules are implemented, agents' optimal decisions depend only on the current state of the economy and not on any expected future states. This property shuts down the mechanism for expectations-driven fluctuations. The proposed policy rules ensure a globally unique and stable equilibrium, regardless of the degree of increasing returns.

We explore asset pricing in the context of the one-sector Benhabib-Farmer-Guo (BFG) model with increasing returns to scale in production and compare our results with financial implications of the standard dynamic stochastic general equilibrium (DSGE) model. Our main goal is to determine the effects of local indeterminacy and the presence of sunspot shocks on asset pricing. We find that the BFG model does not adequately represent key stylized facts of U.S. capital markets and does not improve on the asset-pricing results obtained in the standard DSGE model.

We show that in a standard, technology shock-driven one-sector real business cycle model, the stabilization effects of government fiscal policy depend crucially on how labor hours enter the household's period utility function and the associated labor-market behavior. In particular, when the household utility is logarithmic in both consumption and leisure, income taxes are destabilizing and government purchases are stabilizing. However, the results are reversed when preferences are instead convex in hours worked. That is, income taxes are now stabilizing and public spending is destabilizing. Furthermore, under both preference specifications, the magnitude of cyclical fluctuations in output remains unchanged when the income tax rate and the share of government purchases in GDP are equal (including laissez-faire).

Spatial inequality in developing countries is due to the natural advantages of some regions relative to others and to the presence of agglomeration forces, leading to clustering of activity. This paper reviews and develops some simple models that capture these first and second nature economic geographies. The presence of increasing returns to scale in cities leads to urban structures that are not optimally sized. This depresses the return to job creation, possibly retarding development. Looking at the wider regional structure, development can be associated with large shifts in the location of activity as industry goes from being inward looking to being export oriented.