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In a recent note Latham and Peel (1974) showed, in the context of a model in which labour adjustments are costly and the capital stock is fixed, that any positive value of the returns to labour parameter is compatible with present value maximization. The use of a Cobb-Douglas production function in that paper meant that the presence of increasing, constant or decreasing returns to labour was datum. More recently Gaudet (1977) shows how production in the increasing returns range of the production function may be compatible with competitive equilibrium in a model in which there are two factors of production, labour and capital, and there are costs incurred in adjusting the capital stock. However, Gaudet used a Cobb-Douglas production function with diminishing returns to each factor of production.
The purpose of this note is to show that a firm operating in perfectly competitive markets but facing costs of adjustment to its sole variable input (labour) may well prefer to operate in a region of the production function in which the output elasticity of labour is greater than unity (i.e. increasing returns to labour).
- Type
- Research Article
- Information
- Recherches Économiques de Louvain/ Louvain Economic Review , Volume 47 , Issue 2 , June 1981 , pp. 179 - 183
- Copyright
- Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1981
Footnotes
(1)
The authors are grateful to two anonymous referees for many helpful comments and suggestions for improvement on an earlier version of this note.
(2)
This note is based in part on an earlier note, Optimal Short-Run Returns to Labour by Latham and Peel (1978).
References
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Gaudet, G. (1977), On Returns to Scale and the Stability of Competitive Equilibrium, American Economic Review.Google Scholar
Latham, R.W. and Peel, D.A. (1974), Adjustment Costs and Short-Run Returns to Labour, The Review of Economics and Statistics.Google Scholar
Latham, R.W. and Peel, D.A. (1978), Optimal Short-Run Returns to Labour, Mimeo: University of Liverpool.Google Scholar
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