ABSTRACT The main purpose of this paper is to explicitly derive the possible bias in the Solow residual when there is imperfect competition and non-constant returns to scale. As is known very well, the standard Solow residual assumes perfect competition and constant returns to scale. As is also known, Solow residual is one of the measures of total factor productivity. Therefore, if there is imperfect competition and non-constant returns to scale, then standard Solow measure of productivity will be biased and all the comparisons based on this residual will be unreliable. In this study, we shed some light on these issues.
