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Abstract:

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CEP Discussion Paper
Distorted Monopolistic Competition
Kristian Behrens, Giordano Mion, Yasusada Murata and Jens Suedekum
December 2016
Paper No' CEPDP1457:
Full Paper (pdf)

JEL Classification: D43; D50; L13


Tags: monopolistic competition; welfare distortion; intersectoral distortions; intrasectoral distortions

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 labour allocation and firm entry between sectors and inefficient selection and output within sectors -- is equivalent to the contribution of 6-8% of the total labour input.