Monopolistic Competition in OLG models: efficiency and inequality

Pascal Belan () and Djob Li Ngue Bikob ()
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Djob Li Ngue Bikob: CY Cergy Paris Université, THEMA

No 2026-10, Thema Working Papers from THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS

Abstract: We study intergenerational and intragenerational redistribution in an overlappinggenerations economy with monopolistic competition, in which workers differ in skill and firms pay a fixed entry cost in physical capital. This capital-based fixed cost implies that greater market power raises the equilibrium real interest rate by lowering wages and aggregate saving. We characterize Pareto-efficient steady states and show that productive and dynamic efficiency require correcting the markup distortion and attaining the Golden Rule. Because skill is unobservable, however, the available fiscal instruments cannot in general decentralize an arbitrary distribution along the Pareto frontier, and financing the Pigouvian subsidy may widen wage and consumption inequality. At the second best, the capital correction remains efficient. With homogeneous time preferences, this implies the Golden Rule and leaves labor taxation as the main intragenerational redistributive instrument. With heterogeneous patience, capital policy acquires a redistributive role and the optimal allocation may depart from the Golden Rule.

Keywords: monopolistic competition; overlapping generations; optimal taxation; skill heterogeneity (search for similar items in EconPapers)
JEL-codes: D43 E13 H21 O41 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2026-10

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