No 237 Distorted Monopolistic Competition Kristian Behrens, Giordano Mion, Yasusada Murata, Jens Suedekum November 2016 IMPRINT DICE DISCUSSION PAPER Published by düsseldorf university press (dup) on behalf of Heinrich‐Heine‐Universität Düsseldorf, Faculty of Economics, Düsseldorf Institute for Competition Economics (DICE), Universitätsstraße 1, 40225 Düsseldorf, Germany www.dice.hhu.de Editor: Prof. Dr. Hans‐Theo Normann Düsseldorf Institute for Competition Economics (DICE) Phone: +49(0) 211‐81‐15125, e‐mail:
[email protected] DICE DISCUSSION PAPER All rights reserved. Düsseldorf, Germany, 2016 ISSN 2190‐9938 (online) – ISBN 978‐3‐86304‐236‐3 The working papers published in the Series constitute work in progress circulated to stimulate discussion and critical comments. Views expressed represent exclusively the authors’ own opinions and do not necessarily reflect those of the editor. Distorted Monopolistic Competition Kristian Behrens∗ Giordano Mion† Yasusada Murata‡ Jens Suedekum§ November 2016 Abstract We characterize the equilibrium and optimal resource allocations in a gen- eral 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 quantifica- tion procedure. Using data for France and the United Kingdom, we find that the aggregate welfare distortion — due to inefficient labor allocation and firm entry between sectors and inefficient selection and output within sectors — is equivalent to the contribution of 6–8% of the total labor input. Keywords: monopolistic competition; welfare distortion; intersectoral distor- tions; intrasectoral distortions JEL Classification: D43;D50;L13. ∗Université du Québec à Montréal (esg-uqàm), Canada; National Research University Higher School of Economics, Russian Federation; and cepr.