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Quantifying the gap between equilibrium and optimum under monopolistic competition
journal contribution
posted on 2023-06-09, 21:07 authored by Kristian Behrens, Giordano Mion, Yasusada Murata, Jens SuedekumEquilibria and optima generally differ in imperfectly competitive markets. While this is well understood theoretically, it is unclear how large the welfare distortions are in the aggregate economy. Do they matter quantitatively? To answer this question, we develop a multi-sector monopolistic competition model with endogenous firm entry and selection, productivity, and markups. Using French and UK data, we quantify the gap between the equilibrium and optimal allocations. We find that inefficiencies in the labor allocation and entry between sectors, as well as inefficient selection and output per firm within sectors, generate welfare losses of about 6--10% of GDP.
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Publication status
- Published
File Version
- Accepted version
Journal
The Quarterly Journal of EconomicsISSN
0033-5533Publisher
Oxford University PressExternal DOI
Issue
4Volume
135Page range
2299-2360Department affiliated with
- Economics Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2020-04-21First Open Access (FOA) Date
2022-05-15First Compliant Deposit (FCD) Date
2020-04-20Usage metrics
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