The Verdoorn Law: Some Evidence from Non-parametric Frontier Analysis

In this paper we show how the nature of economies of scale can be assessed using a set of procedures based on non-parametric frontier analysis. Through these procedures it is possible to characterise qualitatively the nature of returns to scale for each observation, yielding important information on the heterogeneity of observations across both time and space. Also an approximate quantitative measure of returns to scale can be produced for each observation. By way of application, we assess economies of scale across a sample of 52 countries, taken from the Penn World Table, mark 5.6. We suggest that this exercise is a useful addition to the existing literature on Verdoorn Law, as non-parametric frontier analysis allows a novel approach to the issues of simultaneity and spuriousness.