Aggregation and Efficiency

Economic theory is typically developed in dimensions higher than those in which it is tested empirically. For example, producer theory is by now well developed for the general m-output, n-input case, although until recently empirical applications of the theory were restricted largely to the scalar output, two-input case. Even now, limitations imposed by data availability and computing resources restrict the empirical application of the theory to “small” numbers of inputs and outputs. The question naturally arises, therefore, whether one’s stories about economic phenomena of interest are sensitive to the degree of aggregation of the underlying data.