INTER­INDUSTRY PROFITABILITY UNDER UNCERTAINTY

Abstract

Summary In a competitive economy under certainty, inter-industry rates of return on real investment would approach equality in the long run. Stigler [141 found empirical evidence that there are significant inter-industry differ- ences in profitability rates. Fisher and Hall [4] and Cootner and Holland [3] suggested that differences in profitability among industries may be attributable to inter-industry differences in risk. If different industries are exposed to different degrees of risk, long-run inter-industry differences in profitability would be expected even in a competitive economy. Over the period 1950–1967 this study used two-way ANOVA to test the null hypothesis that there were no persistent inter-industry differences in risk-adjusted profitability. The null hypothesis was rejected at the .001 level under four different test specifications. These findings may be viewed as an extension of Stigler's work and lend support to the hypothesis of persistent barriers to entry in the United States economy. Our empirical findings are positive in nature. Significant and persistent differences in risk-adjusted inter-industry profitability rates were found, but no attempt was made to identify what factors influence and perpetu- ate these differences. A possible area for future research is an investigation of the relationship between risk-adjusted return and measures of concentration and barriers to entry. Such a study would presumably parallel Bain's [1] prior work.