Paper by CMSSE leading research fellows Kristian Behrens and Yasusada Murata accepted for publication to the The Quarterly Journal of Economics
Our colleagues Kristian Behrens' and Yasusada Murata's paper "Quantifying the gap between equilibrium and optimum under monopolistic competition" (joint with G. Mion and J. Suedekum) has been accepted to The Quarterly Journal of Economics. Congratulations!
Abstract. 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 multisector 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.