Testing For Constant Returns To Scale and Perfect Competition in The Israeli Economy, 1980-2006

Joseph Djivre () and Yigal Menashe ()
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Joseph Djivre: Bank of Israel
Yigal Menashe: Bank of Israel

Israel Economic Review, 2011, vol. 8, issue 2, 67-90

Abstract: In this paper we test the hypothesis of constant returns to scale and no market power, implementing Hall's test (1988, 1991) on Israeli annual real business-sector GDP data. The results validate the hypothesis of perfect competition at the aggregate level and are in line with most empirical research in other countries as well. Thus on the one hand they justify the imposition of the CRS restriction when estimating the business-sector GDP production function in Israel and on the other contradict the assumption of CRS with market power and fixed entry costs in the modeling of the Israeli economy.

Date: 2011
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