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CEP discussion paper

Distorted monopolistic competition

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.

Kristian Behrens, Giordano Mion, Yasusada Murata and Jens Suedekum

6 December 2016     Paper Number CEPDP1457

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This CEP discussion paper is published under the centre's Trade programme.