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Factor Returns and Circular Causality

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  • Haiwen Zhou

Abstract

The presence of circular causality in a region through factor returns is studied in a general equilibrium model in which firms producing final products engage in oligopolistic competition. The intermediate input is produced by capital and labor with a constant returns to scale technology. If the degree of increasing returns in the production of final products is sufficiently high, the return to a factor can increase with the amount of this factor. Thus a higher amount of a factor in a region leads to a higher return to this factor and attracts additional amount of this factor to move in. Capital movement and labor movement can be reinforcing. This type of circular causality means that unbalanced regional development can persist over time.

Suggested Citation

  • Haiwen Zhou, 2011. "Factor Returns and Circular Causality," Southern Economic Journal, John Wiley & Sons, vol. 77(3), pages 795-805, January.
    • Handle: RePEc:wly:soecon:v:77:y:2011:i:3:p:795-805
    DOI: 10.4284/sej.2011.77.3.795
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    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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