OF EMPTY BOXES - RETURNS TO SCALE REVISITED

This paper highlights the bias in returns to scale or price-cost marku p coefficients when estimated from the inverse of a production relatio nship. Coefficients estimated from the inverse are larger than when es timated directly, and the size of the bias increases as the price-cost markup or the scale elasticity of the underlying production function gets smaller. An instrumental variables estimator, although consistent , still exhibits a small sample bias if more than one instrument is us ed. For comparison, direct estimates of scale elasticities are provide d for two-digit SIC private business sectors and for four-digit manufa cturing sectors. Little evidence is found for increasing returns to sc ale in the manufacturing sector.