Abstract
U.S. states during the 1977-1986 business cycle are found to have small but significant technical inefficiency in the private sector. Inefficiency is influenced by several factors, including prior economic performance, location, Hicks labor augmenting technical progress in the manufacturing sector in an earlier 1970s period, college graduation, and income inequality. The existence of a monetary channel, urban agglomeration, and a high school diploma “sheepskin” effect for improved technical efficiency are rejected. Results from earlier studies using noneconometric methods to measure technical efficiency are independently confirmed, indicating that interstate technical inefficiency exists and can be measured using both parametric and nonparametric methods, but may overestimate how different states are from each other.
Highlights
Economic growth has been studied in many countries and over many time periods
The purpose of this paper is to address this gap in the literature by using other interstate studies and their data with a new method to shed new light on economic growth in U.S states during the period 1977-1986
Aggregate and private-sector-only data fit a standard Cobb-Douglas functional form well and were superior to the more general Variable Elasticity of Substitution (VES) form, suggesting that an assumption of constant returns to scale at this high level of aggregation is reasonable
Summary
Economic growth has been studied in many countries and over many time periods. often the subnational regions of a country and how they grow is not well understood or is assumed to be similar to the country overall. While the performance of U.S states has been analyzed at several levels of aggregation, the application of a state-by-state production function at the most aggregate level using Gross State Product (GSP) to measure the entire state's economy is relatively new (Domazlicky and Weber 1998). Such analysis can examine the public/private sector influence on a state's economic growth, as well as lead to the discovery of new factors that influence a state's growth.
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