Quantifying the gap between equilibrium and optimum under monopolistic competition

Behrens, Kristian, Mion, Giordano, Murata, Yasusada and Suedekum, Jens (2020) Quantifying the gap between equilibrium and optimum under monopolistic competition. The Quarterly Journal of Economics, 135 (4). pp. 2299-2360. ISSN 0033-5533

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Equilibria 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.

Item Type: Article
Keywords: monopolistic competition, welfare distortions, equilibrium versus optimum, inefficient entry and selection, inter- and intra-sectoral allocations
Schools and Departments: University of Sussex Business School > Economics
SWORD Depositor: Mx Elements Account
Depositing User: Mx Elements Account
Date Deposited: 21 Apr 2020 07:35
Last Modified: 15 May 2022 01:00
URI: http://sro.sussex.ac.uk/id/eprint/90941

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