DP11642 Distorted monopolistic competition

Author(s): Kristian Behrens, Giordano Mion, Yasusada Murata, Jens Südekum
Publication Date: November 2016
Keyword(s): intersectoral distortions, intrasectoral distortions, monopolistic competition, welfare distortion
JEL(s): D43, D50, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11642

We characterize the equilibrium and optimal resource allocations in a general equilibrium model of monopolistic competition with multiple asymmetric sectors and heterogeneous firms. We first derive general results for additively separable preferences and general productivity distributions, and then analyze specific examples that allow for closed-form solutions and a simple quantification procedure. Using data for France and the United Kingdom, we find that the aggregate welfare distortion - due to inefficient labor allocation and firm entry between sectors and inefficient selection and output within sectors - is equivalent to the contribution of 6-8% of the total labor input.