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Essential Inputs and Unbounded Output: An Alternative Characterization of the Neoclassical Production Function

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  • Andreas Irmen
  • Alfred Maussner

Abstract

The Inada (1963) conditions constitute a defining property of the neoclassical production function with capital and labor as arguments. Are these conditions justifiable on economic grounds? Yes, they are: we show that a production function with positive, yet diminishing marginal products and constant returns to scale satisfies the Inada conditions if i) both inputs are essential and ii) an unbounded quantity of either input leads to unbounded output. This allows for an alternative characterization of the neoclassical production function that altogether dispenses with the Inada conditions. Moreover, we establish that the marginal product of capital vanishes as capital goes to infinity if labor is an essential input. Given the intuitive appeal of the latter feature, we conclude that the neoclassical growth model is a theory of eventual stagnation.

Suggested Citation

  • Andreas Irmen & Alfred Maussner, 2014. "Essential Inputs and Unbounded Output: An Alternative Characterization of the Neoclassical Production Function," CESifo Working Paper Series 5126, CESifo.
    • Handle: RePEc:ces:ceswps:_5126
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    References listed on IDEAS

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    1. Litina, Anastasia & Palivos, Theodore, 2008. "Do Inada conditions imply that production function must be asymptotically Cobb-Douglas? A comment," Economics Letters, Elsevier, vol. 99(3), pages 498-499, June.
    2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    3. de La Grandville, Olivier, 1989. "In Quest of the Slutsky Diamond," American Economic Review, American Economic Association, vol. 79(3), pages 468-481, June.
    4. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151.
    5. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
    6. David Cass, 1965. "Optimum Growth in an Aggregative Model of Capital Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(3), pages 233-240.
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    Cited by:

    1. Dukanich, Lyudmila (Дуканич, Людмила), 2017. "Formation of Consumer Loyalty to Educational Services in the Context of Integration of Educational Systems [Формирование Потребительской Лояльности К Образовательным Услугам В Условиях Интеграции О," Working Papers 061707, Russian Presidential Academy of National Economy and Public Administration.

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    More about this item

    Keywords

    neoclassical growth model; capital accumulation; stagnation; Inada conditions;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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