Returns to Scale, Productivity and Competition: Empirical Evidence from U.S. Manufacturing and Construction Establishments

We build a model of firm entry and exit and show how returns to scale shape firm survival, the equilibrium productivity and size distributions and firm concentration. High productivity dispersion and high concentration ratios need not reflect inefficiencies when returns to scale are strongly decreasing. We apply a broad set of structural and reduced-form estimation techniques to establishment-level data from the U.S. Census of Construction and Manufacturing to assess returns to scale and productivity dispersion across establishments. Indeed, industries with lower returns to scale are characterized by higher productivity dispersion and lower concentration ratios as predicted in the model. Returns to scale are 0.96 on average, but range from 0.86 in Non-metallic Minerals to 1.3 in Semiconductors. Returns to scale tend to be highest in durable manufacturing, medium in non-durable manufacturing and lowest in the production of housing. An economy characterized by such differences in its sectoral production structure will exhibit long-run structural change away from construction and non-durable manufacturing, as in the data, and endogenously replicate the cyclical behavior of relative prices in the U.S.: relative durable prices are counter-cyclical while relative housing prices are pro-cyclical.