Similarity of endowments and the factor price equalization condition

Summary

We give a geometric interpretation of the lens condition, proposed by Deardorff as a shortcut for checking the factor price equalization (FPE) condition. We identify the conditions under which the lens condition implies the FPE condition. If the FPE zone is not a neighborhood of the diagonal allocations, however, the lens condition is irrelevant despite the implication since the FPE condition (hence the lens condition) is unlikely to be satisfied in that case. We give precise conditions under which the lens condition is equivalent to the FPE condition and simultaneously, the FPE zone is a neighborhood of the diagonal allocations.

The author would like to thank an anonymous referee, Bruce Dieffenbach and Michael Jerison for helpful comments.