Replication, Uncertainty, Complementarity, and Returns to Scale in the Production of Resilience

Abstract

A model of capital production that generates U-shaped long-run average-cost curves due to scale effects caused by uncertainty and complementarity among components is presented. Increasing returns to scale are not caused by indivisibilities, and decreasing returns to scale are not caused by fixed factors or substitution. Indivisibilities are created from the profit-maximizing exploitation of returns to scale. Returns to scale cause economies of scale and support a variety of market contexts. Replication and perfect competition are not observationally inconsistent with variable returns to scale, but they are limiting abstract concepts in the face of variable returns to scale.