Indeterminacy with almost constant returns to scale: capital-labor substitution matters

Patrick Pintus ()

Economic Theory, 2006, vol. 28, issue 3, pages 633-649

Abstract: This paper shows, in the benchmark one-sector Ramsey model, that indeterminacy and sunspots may occur when externalities are small, provided that capital and labor are more substitutable than in the usual Cobb-Douglas specification. Key to the results are the general formulations of both preferences and technology that we consider. In particular, indeterminacy is shown to occur under almost constant returns to scale provided that both concavity of utility for consumption is small enough and labor supply is close to indivisible. An important implication of the results is that, when labor supply is positively sloped, indeterminacy does not necessarily require the equilibrium wage-hours locus to be upward sloping. Copyright Springer-Verlag Berlin/Heidelberg 2006

Keywords: Real business cycles; Intertemporal substitution; Capital-labor substitution; Externalities; Indeterminacy; Sunspots. (search for similar items in EconPapers)
Date: 2006
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