A Note on Scale Effects

This note presents a simple extension of the seminal Romer (1990, Journal of Political Economy 98(2), 71-102) paper. Allowing for elasticiTY of substitution between labor and capital to be different from one (CES production function instead of CobbâDouglas), the following results are obtained. (a) The existence of a scale effect depends on the elasticiTY of substitution between reproducible and not reproducible factors. (b) In the case where the elasticiTY of substitution is higher than one, (i) there is a scale effect in the long run, (ii) there is a negative scale effect for poor economies, (iii) as economies grow the share of reproducible factors in the national income increases, (iv) as economies grow the share of workers employed in the production of final goods decreases.

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