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Some Second Thoughts on Monopolistic Distortions and Endogenous Growth

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  • Lutz Arnold
  • Christian Bauer

Abstract

The most fundamental proposition about growth and competition is that there is a tradeoff between static welfare and long-term growth. This paper reconsiders this basic proposition in an increasing product variety endogenous growth model with competitive markets for “old” innovative products and for a traditional good. We shed light on some implications of monopolistic distortions which tend to be ignored by standard models. First, no growth may be better than some growth, since modest positive growth potentially requires sizeable static welfare losses. Second, the economy may converge to a steady state with zero growth, even though another (saddle-point stable) steady state with positive growth exists if the initial share of “cheap” competitive markets is sufficiently high, as this implies a relatively low demand for “expensive” innovative goods. Third, such a “no-growth trap” may happen in a world economy made up of several countries engaged in free trade with each other. The policy implications are that growth-enhancing policies may be misguided and that quick deregulation as well as quick trade liberalization can lead to stagnation in the long term.

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File URL: http://www.bgpe.de/texte/DP/041_arnold_bauer.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 041.

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Length: 20 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:bav:wpaper:041_arnold_bauer

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Web page: http://www.bgpe.de/
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Related research

Keywords: endogenous growth; competition; deregulation; poverty trap; trade liberalization;

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