Testing for Constant Returns to Scale and Perfect Competition in the Israeli Economy, 1980-2006

10/07/2009 |  Djivre Joseph, Menashe Yigal
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The Economy and Economic Activity
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. 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, they contradict the assumption of CRS with market power and fixed entry costs in the modeling of the Israeli economy.
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