Monopolistic Competition, Dynamic Inefficiency and Asset Bubbles

Gianluca Femminis

No 2272, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We emphasise the importance of the market structure to determine whether dynamic inefficiency is possible in a closed economy. We analyse alternative monopolistic competition frameworks where the existence of some pure profit involves the presence of an asset market. When entry is blockaded, dynamic inefficiency is ruled out because every single firm uses a discount rate higher than the output growth rate to evaluate the stream of future profits. When entry is free but involves a sunk cost constant over time, we need to distinguish between the possibility of asset bubbles and dynamic inefficiency, the condition for the latter being more stringent. If the entry cost increases with productivity, dynamically inefficient equilibria are possible only when population grows.

Keywords: Asset Bubbles; Distortions; Dynamic Inefficiency (search for similar items in EconPapers)
JEL-codes: O41 (search for similar items in EconPapers)
Date: 1999-10
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Citations: View citations in EconPapers (1)

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Journal Article: Monopolistic competition, dynamic inefficiency and asset bubbles (2002)
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