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Costs of Low Productivity: Intensive and Extensive Margins

Author

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  • Türkmen GÖKSEL

    (Ankara Universitesi)

Abstract

This paper discusses welfare costs of a decrease in productivity and argues that there are two important channels which cause a reduction in welfare: a decrease in output per firm (intensive margin) and a decrease in number of operating firms (extensive margin). Traditional Dixit-Stiglitz monopolistic competition framework with constant elasticity of substitution utility and common productivity across firms fail to capture the extensive margin. To address this problem, this paper introduces “continuum-quadratic” utility while keeping the other assumptions unchanged and finds that lowering productivity affects not only the intensive but extensive margin as well. This paper highlights the importance of a second channel and argues that this channel should taken into account while calculating the loss of welfare due to a decrease in productivity. Hence, this paper suggests that alternative class of utility specifications (other than constant elasticity of substitution) have to receive more attention with monopolistic competition framework.

Suggested Citation

  • Türkmen GÖKSEL, 2013. "Costs of Low Productivity: Intensive and Extensive Margins," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 28(329), pages 09-20.
  • Handle: RePEc:iif:iifjrn:v:28:y:2013:i:329:p:09-20
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    References listed on IDEAS

    as
    1. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    2. Arnott, Richard J. & Greenwald, Bruce & Kanbur, Ravi & Nalebuff, Barry, 2003. "Joseph Stiglitz and Economics for an Imperfect World," Working Papers 127202, Cornell University, Department of Applied Economics and Management.
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    More about this item

    Keywords

    Continuum-Quadratic Utility; Monopolistic Competition; Productivity; Welfare;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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