PRODUCTION FUNCTION REGRESSIONS, RETURNS TO SCALE, AND EXTERNALITIES

A number of recent papers have used simple linear regressions in an at tempt to identify market structure, the extent of returns to scale, an d possible external effects in U.S. manufacturing industries. The resu lts obtained from these regressions have important implications for se veral branches of modem macroeconomics. As a result, the macro literat ure frequently cites specific numerical evidence from Caballero and Ly ons (1992) and Hall (1990), which suggests that there are quantitative ly significant increasing returns to scale, or external effects in U.S . manufacturing. In contrast, it is the argument of this paper that th is evidence is not convincing. The most robust evidence suggests that the typical U.S. manufacturing industry displays constant returns with no external effects. On the other hand, there is significant heteroge neity across industries.