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Dynamic efficiency and reswitching

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  • van Suntum, Ulrich

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.

Suggested Citation

  • van Suntum, Ulrich, 2008. "Dynamic efficiency and reswitching," CAWM Discussion Papers 8, University of Münster, Center of Applied Economic Research Münster (CAWM).
  • Handle: RePEc:zbw:cawmdp:8
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    References listed on IDEAS

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    1. Avi J. Cohen, 2003. "Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies?," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 199-214, Winter.
    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, vol. 30(5), pages 737-765, September.
    3. Bliss, C. J., 1975. "Capital Theory and the Distribution of Income," Elsevier Monographs, Elsevier, edition 1, number 9780720436044 edited by Bliss, C. J..
    4. Harcourt,G. C., 1972. "Some Cambridge Controversies in the Theory of Capital," Cambridge Books, Cambridge University Press, number 9780521096720, April.
    5. A. Cohen & G. Harcourt., 2009. "Whatever Happened to the Cambridge Capital Theory Controversies?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 8.
    6. Nuti, Domenico M, 1973. "On the Truncation of Production Flows," Kyklos, Wiley Blackwell, vol. 26(3), pages 485-496.
    7. 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.
    8. Flemming, J S & Wright, J F, 1971. "Uniqueness of the Internal Rate of Return: A Generalisation," Economic Journal, Royal Economic Society, vol. 81(322), pages 256-263, June.
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    More about this item

    JEL classification:

    • B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical
    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • D2 - Microeconomics - - Production and Organizations
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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