Estimation of Threshold Costs in Service Industries

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Abstract
In an article in the European Economic Review published in 1982, a theory was presented which explains labour costs as a function of plant size (shop size, in the case of retailing). The theory has been applied and corroborated in many subsequent empirical studies, and is in use for predictions, policy evaluations, the consultancy of firms, and further research. The present paper discusses the limitations of the original simplified theory, the estimation biases that may result, and a possible explanation of the apparent lack of actual bias in empirical practice. The purpose of the paper is to further a more sophisticated interpretation and use of the theory.

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