Reference : Essential Inputs and Unbounded Output: an Alternative Characterization of the Neoclas...
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Business & economic sciences : Macroeconomics & monetary economics
Essential Inputs and Unbounded Output: an Alternative Characterization of the Neoclassical Production Function
Irmen, Andreas mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA) >]
Maußner, Alfred mailto []
[en] Neoclassical Growth Model ; Capital Accumulation ; Stagnation ; Inada Conditions
[en] 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.
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