Returns to Scale and Regional Growth: The Static‐Dynamic Verdoorn Law Paradox Revisited

30 Pages Posted: 24 Oct 2014

See all articles by John McCombie

John McCombie

University of Cambridge - Department of Land Economy

Mark Roberts

University of Cambridge - Department of Land Economy

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

It has long been an article of faith amongst regional economists that increasing returns to scale are necessary to explain the punctiform location of economic activity and population. However, there is no consensus in the empirical literature over whether returns to scale are constant or increasing. A notable example of this lack of agreement is provided by the static‐dynamic Verdoorn law paradox. While the dynamic Verdoorn law (specified using growth rates) yields estimates of substantial increasing returns to scale, the static Verdoorn law (specified using log‐levels) indicates only the presence of constant returns to scale. In this paper, we explain the static‐dynamic Verdoorn law paradox by showing that estimates of returns to scale obtained using the static law are subject to a spatial aggregation bias, which biases the estimates towards constant returns to scale. We illustrate our arguments by means of simulation exercises. The results obtained hold general lessons for applied economic analysis using spatial data.

Suggested Citation

McCombie, John S. L. and Roberts, Mark, Returns to Scale and Regional Growth: The Static‐Dynamic Verdoorn Law Paradox Revisited (May 2007). Journal of Regional Science, Vol. 47, Issue 2, pp. 179-208, 2007, Available at SSRN: https://ssrn.com/abstract=2514615 or http://dx.doi.org/10.1111/j.1467-9787.2007.00505.x

John S. L. McCombie (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Mark Roberts

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk

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