← Search

Quarterly Journal of Economics Vol. 135 No. 4 2020

Quantifying the Gap Between Equilibrium and Optimum under Monopolistic Competition*

Kristian Behrens1; Giordano Mion2; Yasusada Murata3; Jens Suedekum4

1 Université du Québec à Montréal, HSE, and Centre for Economic Policy Research · 2 University of Sussex, Centre for Economic Performance, Centre for Economic Policy Research, CESifo, and National Institute of Economic and Social Research · 3 Nihon University and HSE · 4 Heinrich-Heine-Universität Düsseldorf, Centre for Economic Policy Research, and CESifo

Abstract

Equilibria and optima generally differ in imperfectly competitive markets. Although 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.

DOI
10.1093/qje/qjaa017
Volume
135
Issue
4
Pages
2299-2360
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite