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Testing Profit Rate Equalization in the U.S. Manufacturing Sector: 1947-1998

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  • Ajit Zacharias
Abstract
Long-run differentials in interindustrial profitability are relevant for several areas of theoretical and applied economics because they characterize the overall nature of competition in a capitalist economy. This paper argues that the existing empirical models of competition in the industrial organization literature suffer from serious flaws. An alternative framework, based on recent advances in the econometric modeling of the long run, is developed for estimating the size of long-run profit rate differentials. It is shown that this framework generates separate, industry-specific estimates of two potential components of long-run profit rate differentials identified in economic theory. One component, the noncompetitive differential, stems from factors that do not depend directly on the state of competition; these factors are generally characterized as risk and other premia. The other component, the competitive differential, is due to factors that depend directly on the state of competition (factors such as degree of concentration and economies of scale). Estimates provided here show that during the period under study, the group of industries with statistically insignificant competitive differentials accounted for 72 percent of manufacturing profits and 75 percent of manufacturing capital stock, which is interpreted as lending support to the theories of competition advanced by the classical economists and their modern followers.

Suggested Citation

  • Ajit Zacharias, 2001. "Testing Profit Rate Equalization in the U.S. Manufacturing Sector: 1947-1998," Economics Working Paper Archive wp_321, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_321
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    References listed on IDEAS

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    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    Cited by:

    1. Peter Hans Matthews, 2005. "Paradise lost and found? The econometric contributions of Clive W. J. Granger and Robert F. Engle," Review of Political Economy, Taylor & Francis Journals, vol. 17(1), pages 1-28.
    2. Stefania Tescari & Andrea Vaona, 2014. "Regulating Rates of Return Do Gravitate in US Manufacturing!," Metroeconomica, Wiley Blackwell, vol. 65(3), pages 377-396, July.
    3. Tsoulfidis, Lefteris & Tsaliki, Persefoni, 2011. "Classical competition and regulating capital: theory and empirical evidence," MPRA Paper 51334, University Library of Munich, Germany, revised 2013.

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