Increasing returns in the aggregate: fact or fiction?

Abstract

Purpose

This paper aims to investigate whether empirical evidence for scale economies can be found across countries and if so, whether this evidence varies across the stage of development.

Design/methodology/approach

The paper uses statistical methods to make comparisons between countries.

Findings

The empirical results suggest overall evidence towards aggregate increasing returns across all samples. Within the Cobb‐Douglas framework, stronger evidence for aggregate increasing returns is found among samples depicting economies in the early stages of development. The CES framework in turn supports aggregate scale economies for advanced economies, while unitary elasticity of substitution cannot be rejected for less developed economies, giving further support for the Cobb‐Douglas estimates.

Research limitations/implications

Given that evidence for scale economies is found within different estimation frameworks for different groups of economies, comparative judgment is prevented. The results nevertheless provide evidence on the overall relevance of scale economies within and across groups of economies, while also giving a clear indication of the relevance of stage of development in economic growth and development analysis.

Originality/value

The most fundamental insight of the empirical results presented in this paper is that there is no reason to assume that the determinants of growth or the parameters guiding economies' adjustments towards their steady states or growth paths will be similar for economies at different stages of development, given their significant structural differences, whether in terms of production structures and characteristics or consumption patterns.

Citation

Johanna Perälä, M. (2008), "Increasing returns in the aggregate: fact or fiction?", Journal of Economic Studies, Vol. 35 No. 2, pp. 112-153. https://doi.org/10.1108/01443580810870137