Production Factor Returns: the Role of Factor Utilization

Gilbert Cette, Nicolas Dromel, Rémy Lecat and Anne-Charlotte Paret

To what extent do changes in factors of production affect production? The extent of economies of scale is an important question, having considerable implications in the analysis of trade, industrial organisation, growth and economic fluctuations. Some studies suggest the existence of short-term economies of scale, that is, changes in production that are more than proportional to the changes in factors of production. In this article, Gilbert Cette, Nicolas Dromel, Rémy Lecat and Anne-Charlotte Paret, using French data, explain how what appear to be growing economies of scale can be due to omitted variable bias in the use of production factors.
Their empirical analysis uses 9,335 observations made during between 1992 and 2008, from an unbalanced panel of French firms, and which came from the fusion of two types of data collected every year by the Banque de France: 1) the Fichier Bancaire des Entreprises, FiBEn (banking data base on business) and 2) data from a specific enquiry into the Durée d’Utilisation des Equipements productifs, DUE (Equipment operating times). The FiBEn is a very large data base built on the annual taxation documents (balance sheets, income statements and the like) of a large number of firms. It allows, for example, a calculation for each firm and each year, of the volume of added value, capital stock and employment. The DUE enquiry directly asked firms about, inter alia, their working hours, their rate of productive capacities utilisation and the changes to their equipment operating times compared with the preceding year. These individual data are unique in the richness of information they contain and the originality of the analysis they allow. Cette, Dromel, Lecat and Paret draw two principal conclusions here. First, when working hours, equipment operating times and rate of utilisation of productive capacities are taken into account in the production function, the estimated economies of scale are constant. Omitting these variables leads to biased estimations of returns, which appear to be growing. Second, it is the variations in equipment operating times that contribute the most to this statistical bias when they are left out. In sum, the factors of production are insufficient to measure precisely the economies of scale: it is essential also to take into account the duration and degree of their utilisation.
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Original title of the article : “Production Factor Returns: the Role of Factor Utilization”
Forthcoming in : Review of Economics and Statistics
Available at : http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00434
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