On the Size of the Active Management Industry

We argue that active management’s popularity is not puzzling despite the industry’s poor track record. Our explanation features decreasing returns to scale: As the industry’s size increases, every manager’s ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.

A Note on Strategic Delegation: The Role of Decreasing Returns to Scale

We build a model of optimal design of managerial incentive schemes when the production technology exhibits decreasing returns to scale and firms compete à la Cournot. We borrow Fershtman and Judd (1987) and Kräkel (2005) framework. We show how there is a dominant strategy for entrepreneurs to delegate output decisions. Results depend on the degree of diseconomies of scale. We demostrate how for a class of parameters, managers may increase profits through delegation, a result that with constant returns does not hold.

Aggregate returns to scale: why measurement is imprecise

The extent to which there are aggregate returns to scale at the level of aggregate production has important implications both for the types of shocks generating business cycles and for optimal policy. However, prior attempts to measure the extent of these returns using instrumental variable techniques have yielded quite imprecise estimates. In this article, we show that the production shocks implied by a range of returns to scale that encompasses both large increasing returns and large decreasing returns are almost identical. This makes clear that there is a fundamental reason for the imprecision of prior estimates and casts doubt on our ability to generate more precise estimatesBusiness cycles

Does accounting for inefficiency affect the time-varying short and long-run returns to scale?

The returns to scale for nineteen South Asian countries are estimated using window and cumulative rolling stochastic frontier regression analysis. The stochastic frontier analysis accounts for technical inefficiency of Hicks non-neutral technology production function in the estimation of the returns to scale. The window rolling regression and cumulative rolling regression allows the estimation of short and long run time-varying returns to scale, respectively. Empirical application to Asian agriculture sector using Food and Agricultural Organization data from 1961-2008 indicates returns to scale are under (over) estimated by the traditional panel models in the short (long) run time-varying estimation. The time-varying estimates of returns to scale indicate decreasing trend in the short run compared to long run analysis. --Asian agriculture sector,stochastic frontier analysis,window and cumulative time-varying input elasticities and returns to scale,one-way fixed effect,1961-2008

Economies of Scale in the Canadian Food Processing Industry

Cost functions for three Canadian manufacturing agri-food sectors (meat, bakery and dairy) are estimated using provincial data from 1990 to 1999. A translog functional form is used and the concavity property is imposed locally. The Morishima substitution elasticities and returns to scale elasticities are computed for different provinces. Inference is carried out using asymptotic theory as well as bootstrap methods. In particular, the ability of the double bootstrap to provide refinements in inference is investigated. The evidence suggests that there are significant substitution possibilities between the agricultural input and other production factors in the meat and bakery sectors. Scale elasticity parameters indicate that increasing returns to scale are present in small bakery industries. While point estimates suggest that increasing returns to scale exist at the industry level in the meat sector, statistical inference cannot rule the existence of decreasing returns to scale. To account for supply management in the dairy sector, separability between raw milk and the other inputs was introduced. There exists evidence of increasing returns to scale at the industry level in the dairy industries of Alberta and New Brunswick. The scale elasticity for the two largest provinces (Ontario and Quebec) is greater than one, but inference does not reject the null hypothesis of increasing returns to scale.Translog cost function; Canadian food processing industry; returns to scale; double bootstrap

Linear programming solutions and distance functions under a constant returns to scale technology

This note generalizes analytical relationships among activity variables of DEA models previously derived by Boussemart, Briec and Leleu (2007). We relax the asumption of constant returns to scale by showing that the key results hold under a weaker asumption of homogeneity. We use the notion of alpha-returns to scale to extend the analysis to strictly increasing and decreasing returns, covering now the whole range of returns to scale for multi-output homogenous technologies.Data envelopment analysis, Methodology, Production

Capital, wages and growth: Theory and evidence

Returns to scale to capital and the strength of capital externalities play a key role for the empirical predictions and policy implications of different growth theories. We show that both can be identified with individual wage data and implement our approach at the city-level using US Census data on individuals in 173 cities for 1970, 1980, and 1990. Estimation takes into account fixed effects, endogeneity of capital accumulation, and measurement error. We find no evidence for human or physical capital externalities and decreasing aggregate returns to capital. Returns to scale to physical and human capital are around 80 percent. We also find strong complementarities between human capital and labor and substantial total employment externalities.Returns to scale to capital, human capital, capital externalities, complementarities, scale effects, cities

Intercity Trade and Convergent versus Divergent Urban Growth

The paper studies intercity trade and growth in an overlapping-generations economy where tradeable goods are produced using a composite of capital, raw labor and intermediates, and are combined in each city to produce a composite. The composite is used for consumption and investment. Tax-financed investment that affects commuting costs endogenizes city size. A combination of weak (strong) diminishing returns and strong (weak) market size effects can lead to increasing (decreasing) returns to scale. Autarkic urban growth may be parallel or divergent. Capital growth in the integrated economy has the same dynamic properties as its counterpart for an economy with autarkic cities but leads to national constant returns to scale.

Liquidity Management with Decreasing-returns-to-scale and Secured Credit Line

This paper examines the dividend and investment policies of a cash constrained firm that has access to costly external funding. We depart from the literature by allowing the firm to issue collateralized debt to increase its investment in productive assets resulting in a performance sensitive interest rate on debt. We formulate this problem as a bi-dimensional singular control problem and use both a viscosity solution approch and a verification tech- nique to get qualitative properties of the value function. We further solve quasi-explicitly the control problem in two special cases

Real-Time Decentralization Information Processing and Returns to Scale

We use a model of real-time decentralized information processing to understand how constraints on human information processing affect the returns to scale of organizations. We identify three informational (dis)economies of scale: diversification of heterogeneous risks (positive), sharing of information and of costs (positive), and crowding out of recent information due to information processing delay (negative). Because decision rules are endogenous, delay does not inexorably lead to decreasing returns to scale. However, returns are more likely to be decreasing when computation constraints, rather than sampling costs, limit the information upon which decisions are conditioned. The results illustrate how information processing constraints together with the requirement of informational integration cause a breakdown of the replication arguments that have been used to establish nondecreasing technological returns to scale.Information Systems Working Papers Serie