Welfare analysis and policy implications in Melitz-type model where markup differs across industries
ISER Discussion Paper from Institute of Social and Economic Research, Osaka University
We construct a monopolistic competition model considering different markups across industries and firm-level heterogeneity of productivity. An excess entry occurs in low-markup (competitive) industry, and vice versa in high-markup (non-competitive) industry. To achieve the optimum allocation, a social planner should implement an appropriate mix of policies, whose requirement is tighter than the homogeneous-firm model under some situations. The total amount of optimum subsidy (tax) is dependent on the property of distribution when the elasticity of substitution between industries is above unity.
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