VARIABLE RETURNS TO SCALE AND REGIONAL RESOURCE ALLOCATION UNDER UNCERTAINTY*

Abstract

ABSTRACT. This paper investigates the resource allocational implications of intra‐industrial externalities, i.e., variable returns to scale (VRS), in a two‐region general equilibrium model of production under uncertainty. It is shown that most standard results concerning changes in the goods price ratio with constant returns to scale (CRS) under uncertainty generalize to VRS. In contrast, standard results concerning changes in factor endowments extend from CRS to decreasing returns to scale, but not to all permissible levels of increasing returns to scale. Thus, such theorems as factor price equalization and Rybczynski do not generalize to all real‐world levels of VRS.