Year: 2008
Type: article
Abstract: The inefficiencies related to endogenous product creation and variety under monopolistic competition are two-fold: one static-the misalignment between consumers and producers regarding the value of a new variety; and one dynamic-time variation in markups.Quantitatively, the welfare costs of the former are potentially very large relative to the latter.For a calibrated version of our model with these distortions, their total cost amounts to 2 percent of consumption.Appropriate taxation schemes can implement the optimum amount of entry and variety.Elastic labor introduces a further distortion that should be corrected by subsidizing labor at a rate equal to the markup for goods, in order to preserve profit margins and hence entry incentives.
DOI: 10.1257/mac.20170303
Language: English
Topic: Economic theories and models
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1512663045