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Returns to Scale From Random Factor Services: Existence and Scope

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  • Michael Rothschild
  • Gregory J. Werden

Abstract

This note demonstrates that random delivery of services of factors of production is a ubiquitous source of increasing returns to scale with otherwise constant returns technology. It is also shown that such economies must eventually be exhausted -- that returns to scale are asymptotically constant. This creates the possibility that such economies may be empirically unimportant because, in most interesting cases, they are (nearly) exhausted at rather small scales of production. Computation are presented which suggest that this is indeed the case. The model of this note is simpler and more general than the "repairman problem" which exhibits similar properties.

Suggested Citation

  • Michael Rothschild & Gregory J. Werden, 1979. "Returns to Scale From Random Factor Services: Existence and Scope," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 329-335, Spring.
    • Handle: RePEc:rje:bellje:v:10:y:1979:i:spring:p:329-335
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    Cited by:

    1. Gruenspecht, Howard K., 2002. "Regulatory Tailoring, Reliability, and Price Volatility with Stochastic Breakdowns," Discussion Papers 10781, Resources for the Future.
    2. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
    3. Martin Gaynor & Gerard F. Anderson, 1991. "Hospital Costs and the Cost of Empty Hospital Beds," NBER Working Papers 3872, National Bureau of Economic Research, Inc.
    4. Gruenspecht, Howard, 2002. "Regulatory Tailoring, Reliability, and Price Volatility with Stochastic Breakdowns," RFF Working Paper Series dp-02-37, Resources for the Future.

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