 Costs of Low Productivity: Intensive and Extensive MarginsIktisat Isletme ve Finans, 2013, vol. 28, issue 329, 09-20 Abstract: This paper discusses welfare costs of a decrease in productivity and argues that there are two important channels which cause a reduction in welfare: a decrease in output per firm (intensive margin) and a decrease in number of operating firms (extensive margin). Traditional Dixit-Stiglitz monopolistic competition framework with constant elasticity of substitution utility and common productivity across firms fail to capture the extensive margin. To address this problem, this paper introduces “continuum-quadratic” utility while keeping the other assumptions unchanged and finds that lowering productivity affects not only the intensive but extensive margin as well. This paper highlights the importance of a second channel and argues that this channel should taken into account while calculating the loss of welfare due to a decrease in productivity. Hence, this paper suggests that alternative class of utility specifications (other than constant elasticity of substitution) have to receive more attention with monopolistic competition framework. Keywords: Continuum-Quadratic Utility; Monopolistic Competition; Productivity; Welfare (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:iif:iifjrn:v:28:y:2013:i:329:p:09-20 Ordering information: This journal article can be ordered from Access Statistics for this article Iktisat Isletme ve Finans is currently edited by Ali Bilge More articles in Iktisat Isletme ve Finans from Bilgesel Yayincilik |
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