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Quantifying the Gap between Equilibrium and Optimum Under Monopolistic Competition

Kristian Behrens (), Giordano Mion (), Yasusada Murata and Jens Suedekum ()

No WP BRP 185/EC/2018, HSE Working papers from National Research University Higher School of Economics

Abstract: Equilibria and optima generally differ in imperfectly competitive markets. While this is well understood theoretically, it is unclear how large the welfare distortions are in the aggregate economy. Do they matter quantitatively? To answer this question, we develop a multi-sector monopolistic competition model with endogenous firm entry and selection, productivity, and markups. Using French and British data, we quantify the gap between the equilibrium and optimal allocations. In our preferred specification, inefficiencies in the labor allocation and entry between sectors, as well as inefficient selection and output per firm within sectors, generate welfare losses of about 6–10% of GDP.

Keywords: monopolistic competition; welfare distortions; equilibrium versus optimum; inefficient entry and selection; inter- and intra-sectoral allocations (search for similar items in EconPapers)
JEL-codes: D43 D50 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
Date: 2018
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Published in WP BRP Series: Economics / EC, March 2018, pages 1-72

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