Is constant returns-to-scale a restrictive assumption for sector-level empirical macroeconomics? The case of Europe

Abstract

ABSTRACTAssuming constant returns-to-scale is commonly agreed for empirical macroeconomic studies when countries are of interest. Recently, an increasing number of works have started to look at sectors building on the same assumption. In this letter, we question the reliability of this assumption for 10 European sectors for the period 1995–2014, for different production factor combinations. We make use of a simple sample-based nonparametric test that does not require any assumptions for any aspect of the production process. Our results suggest that, in general, this assumption is rather acceptable and that the specification with only capital and labour is the best in this case.