Economics Letters 81 (2003) 361 363

www.elsevier.com/locate/econbase

Inada conditions imply that production function must be

asymptotically CobbDouglas
Paulo Barelli a, Samuel de Abreu Pessoa b,*
a
b

Department of Economics, Columbia University, 420 W 118th Street, New York, NY 10027, USA
Graduate School of Economics (EPGE), Fundacao Getulio Vargas, Praia de Botafogo 190, 1125,
Rio de Janeiro, RJ 22253-900, Brazil
Received 23 March 2003; accepted 26 June 2003

Abstract
We show that every twice-continuously differentiable and strictly concave function f: R+ ! R+ can be bracketed
between two CES functions at each open interval. In particular, for the Inada conditions to hold, a production
function must be asymptotically Cobb Douglas.
D 2003 Elsevier B.V. All rights reserved.
Keywords: Inada condition; Production function; Elasticity of substitution
JEL classification: E13; E23

1. Introduction
The celebrated Inada conditions that a (per-capita) production function f: R+ ! R+ should satisfy
f 0 0; f V0 l;

f Vl 0 and f l l

on top of being strictly increasing ( f V(k) > 0) and strictly concave ( f U(k) < 0) for all kaR+ are widely used
in the applied literature. In 1963, Inada noticed that those conditions had been implicitly used by Usawa
in his series of two-sector growth models and that those conditions were sufficient to ensure existence of
equilibria. In addition, those conditions are intuitively very plausible and easily justified. It is then not

* Corresponding author. Tel.: +55-21-2559-5835; fax: +55-21-2553-8821.

E-mail addresses: pb230@columbia.edu (P. Barelli), pessoa@fgv.br (S. de Abreu Pessoa).
0165-1765/$ - see front matter D 2003 Elsevier B.V. All rights reserved.
doi:10.1016/S0165-1765(03)00218-0

362

P. Barelli, S. de Abreu Pessoa / Economics Letters 81 (2003) 361363

surprising that the assumptions (Inada, 1963) have not yet been subjected to a more thorough
investigation. In this note, we show that they impose strong restrictions on the asymptotic behavior
of the elasticity of substitution between capital and labor. In particular, for Eq. (1) to hold, the production
function must be asymptotically CobbDouglas (that is, its elasticity of substitution is asymptotically
equal to 1), as k approaches either zero or infinity.

2. Result
We assume that faC 2(R+) is increasing and strictly concave. The elasticity of substitution between
capital and labor is given by
rku 

f Vk f k  kf Vk
z0;
kf kf Wk

and is assumed bounded and continuous.

In order to prove Proposition 1 below, we will make use of two lemmas, which show that any
production function can be approximated both from above and from below by suitable CES functions.
Let re u r(0)  e, re u r(0) + e and define
r
! r1
f k  kf Vk
hk

k
hk
; Ckr u
and aak u
hku
1
1 :
f Vk
hk k r
hk k r
Lemma 1. For every e >0, there exists k >0 such that
e
re
re
f k
f k
re
re rer1
re
re r r1
e
re 1
e re 1 V f xV
1

a

a
x
1

a

a
x

e
k
k
k
k
Ckre
Ckr

for all xa[0, k].

Proof. Continuity and boundedness of r(k) assure that, for any e>0, there exists k>0 such that
re VrxVre for all xa0; k:
From the definition of h above, we have dh(x)/h(x)=(1/r(x))dx/x. Hence
1 dx dhx 1 dx
V
V
for all xa0; k:
re x
hx re x
Integrating and substituting for h, we get:
 x  r1
 x  r1e
f x
e
hk
Vhk
xV
x for all xa0; k;
k
f Vx
k

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363

where the inequality follows from h(k)>0, which comes from f being concave. Integrating again:


hk
1

re
f k  k
hk
1

k re

x
k

re 1
re

re 1
re

 r r1
e

hk
1

 r r1
e
e

re
V f xV f k  k
hk
1

k re

x
k

re 1
re

re 1
re

e
 rer1

for all xa0; k:

e
 rer1

Now use the definitions of Ckr and akr and we are done.

Lemma 2. If r(l) is well defined, then for every e >0 there exists k >0 such that
re
e
f k
f k
e
e re 1
re
re rer1 rer1
V f xV re 1  ark ark x re re 1
re 1  ak ak x e
Ck
Ck

for all xa[k,l), where now re u r(l)  e, re u r(l) + e.

Proof. Just repeat the proof of Lemma 1 with proper adjustments.

We are now in position to state

Proposition 1. (1) If r(0) < 1 then f(0) = 0, f V(0) < l and limkj0(kf V(k)/f(k)) = 1; (2) if r(0)>1, then
f(0)>0, f V(0) = l and limkj0(kf V(k)/f(k)) = 0; (3) if r(l) < 1, then f(l) < l, f V(l) = 0 and
limkcl(kf V(k)/f(k)) = 0; (4) if r(l)>1, then f(l) = l, f V(l)>0 and limkcl(kf V(k)/f(k)) = 1.
Proof. We can set e in Lemmas 1 and 2 such that: (1) r(0) < 1 Z re < 1; (2) r(0)>1 Z re>1; (3)
r(l) < 1 Z re < 1; (4) r(l)>1 Z re>1.
Taking respectively the limit for xj0 in Lemma 1 and for xcl in Lemma 2, the results for f(0) and
f(l) follow from the asymptotic properties of the CES function.. To derive the results for kf V(k)/f (k), we
divide (3) (and the equivalent expression from the proof of Lemma 2) by x and take the limit. Likewise, to
get the results for f V(0) and f V(l), we divide the inequalities in Lemmas 1 and 2 by x, and then take the
limit.
5
In particular, if we force f(0) = 0 and f V(0) = l, then r(0) must be equal to 1. Since the CobbDouglas
functional form is the one that has r(k) constant and equal to 1, we conclude that the Inada conditions
force the production function to be asymptotically CobbDouglas. Whenever evidence points out that
the CobbDouglas functional form is not appropriate for some application, we are forced to give up the
full force of the Inada conditions and perhaps some of its implications.

Reference
Inada, K.-I., 1963. On a two-sector model of economic growth: comments and a generalization. Review of Economic Studies
30 (2), 119 127.