Essential Inputs and Unbounded Output: An Alternative Characterization of the Neoclassical Production Function

10 Pages Posted: 14 Jan 2015

See all articles by Andreas Irmen

Andreas Irmen

University of Luxembourg - Ceter for Research in Economic Analysis (CREA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Alfred Maussner

University of Augsburg - Faculty of Business and Economics

Date Written: December 29, 2014

Abstract

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.

Keywords: neoclassical growth model, capital accumulation, stagnation, Inada conditions

JEL Classification: E10, O10, O40

Suggested Citation

Irmen, Andreas and Maussner, Alfred, Essential Inputs and Unbounded Output: An Alternative Characterization of the Neoclassical Production Function (December 29, 2014). CESifo Working Paper Series No. 5126. Available at SSRN: https://ssrn.com/abstract=2549019

Andreas Irmen (Contact Author)

University of Luxembourg - Ceter for Research in Economic Analysis (CREA) ( email )

162a, avenue de la Faïencerie
Luxembourg, L – 1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/crea/people/andreas_irmen

CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Poschinger Str. 5
Munich, DE-81679
Germany

Alfred Maussner

University of Augsburg - Faculty of Business and Economics ( email )

Universitaetsstr. 16
86135 Augsburg
Germany
+49 821 598 4187 (Phone)
+49 821 598 4231 (Fax)

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