DP11774 On measuring welfare changes when varieties are endogenous

Author(s): Kristian Behrens, Yoshitsugu Kanemoto, Yasusada Murata
Publication Date: January 2017
Keyword(s): monopolistic competition, welfare changes
JEL(s): D60, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11774

Extant studies take it for granted that there is a one-to-one mapping from a change in the equilibrium allocation to a change in welfare. We show that such a premise does not apply to fairly standard models of monopolistic competition. For any change in the equilibrium allocation, there exist an infinite number of possible welfare changes when the mass of varieties consumed differs between the two equilibria. Our results thus reveal a fundamental difficulty in measuring welfare changes when varieties are endogenous.