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Dynamic Production Theory under No-Arbitrage Constraints

Zhao, Guo (2014): Dynamic Production Theory under No-Arbitrage Constraints.

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Abstract

I propose a dynamic production model under the joint constraints of technology, budget and no arbitrage. Comparative static and dynamic analysis indicate that this model is consistent with the behavior of firms in reality, and can explain a wide range of economic phenomena. Compared with classical production theory, this model confers some methodological advantages: (i) it turns out to be a natural generalization of classical production theory; (ii) it constitutes a marriage of production theory and finance; (iii) it constructs a bridge between microeconomics and macroeconomics; (iv) it successfully reconciles some long-standing contradictions arising from classical theory.

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