DP2272 Monopolistic Competition, Dynamic Inefficiency and Asset Bubbles
|Publication Date:||October 1999|
|Keyword(s):||Asset Bubbles, Distortions, Dynamic Inefficiency|
|Programme Areas:||International Macroeconomics, Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=2272|
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.