Monopolistic Competition, Dynamic Inefficiency and Asset Bubbles
AbstractWe emphasise the importance of the market structure to determine whether dynamic inefficiency is possible in a closed economy. We analyse alternative monopolistic competition frameworks where the existence of some pure profit involves the presence of an asset market. When entry is blockaded, dynamic inefficiency is ruled out because every single firm uses a discount rate higher than the output growth rate to evaluate the stream of future profits. When entry is free but involves a sunk cost constant over time, we need to distinguish between the possibility of asset bubbles and dynamic inefficiency, the condition for the latter being more stringent. If the entry cost increases with productivity, dynamically inefficient equilibria are possible only when population grows.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2272.
Date of creation: Oct 1999
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Other versions of this item:
- Femminis, Gianluca, 2002. "Monopolistic competition, dynamic inefficiency and asset bubbles," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 985-1007, June.
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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