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Dynamic efficiency and reswitching

  • van Suntum, Ulrich
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    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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    Paper provided by Center of Applied Economic Research Münster (CAWM), University of Münster in its series CAWM Discussion Papers with number 8.

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    Date of creation: 2008
    Date of revision:
    Handle: RePEc:zbw:cawmdp:8
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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. Harcourt, G C, 1969. "Some Cambridge Controversies in the Theory of Capital," Journal of Economic Literature, American Economic Association, vol. 7(2), pages 369-405, June.
    3. 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 256-63, June.
    4. 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.
    5. Nuti, Domenico M, 1973. "On the Truncation of Production Flows," Kyklos, Wiley Blackwell, vol. 26(3), pages 485-96.
    6. A. Cohen & G. Harcourt., 2009. "Whatever Happened to the Cambridge Capital Theory Controversies?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 8.
    7. 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.
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