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Dynamic Efficiency and Reswitching

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  • Ulrich van Suntum
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    Abstract

    The paper argues that, from a dynamic efficiency perspective, intersections of factor price frontiers are irrelevant to the choice of techniques. Because every change in technique involves a temporary loss or gain in both profit and per capita consumption within the transition period, its profitability should be calculated by applying the present value criterion to the entire change process. With only one transition period, there is generally a unique interest rate at which the change in technique breaks even. This critical interest rate is generally the same for a profit maximizing firm as for a central planner who seeks to maximize consumption per unit of work. This critical interest rate does not generally coincide with either of the interest rates at which the factor price frontiers intersect. Therefore, common proofs of the socalled reswitching phenomenon do not stand up well from a dynamic efficiency perspective.

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    Bibliographic Info

    Paper provided by Institute of Spatial and Housing Economics, Munster Universitary in its series Working Papers with number 200122.

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    Handle: RePEc:muc:wpaper:200122

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    1. Flemming, J S & Wright, J F, 1971. "Uniqueness of the Internal Rate of Return: A Generalisation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 81(322), pages 256-63, June.
    2. Zonghie Han & Bertram Schefold, 2006. "An empirical investigation of paradoxes: reswitching and reverse capital deepening in capital theory," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 30(5), pages 737-765, September.
    3. Arrow, Kenneth J & Levhari, David, 1969. "Uniqueness of the Internal Rate of Return with Variable Life of Investment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 79(315), pages 560-66, September.
    4. A. Cohen & G. Harcourt., 2009. "Whatever Happened to the Cambridge Capital Theory Controversies?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 8.
    5. Kurz,Heinz D. & Salvadori,Neri, 1997. "Theory of Production," Cambridge Books, Cambridge University Press, number 9780521588676, 9.
    6. Nuti, Domenico M, 1973. "On the Truncation of Production Flows," Kyklos, Wiley Blackwell, vol. 26(3), pages 485-96.
    7. Harcourt,G. C., 1972. "Some Cambridge Controversies in the Theory of Capital," Cambridge Books, Cambridge University Press, number 9780521096720, 9.
    8. Hagemann, Harald & Kurz, Heinz D, 1976. "The Return to the Same Truncation Period and Reswitching of Techniques in Neo-Austrian and More General Models," Kyklos, Wiley Blackwell, vol. 29(4), pages 678-708.
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