De-Industrialisation, Entrepreneurial Industries and Welfare
AbstractWe develop a two-sector general equilibrium model with monopolistic competition featuring nonhomothetic production and a variable demand elasticity for the manufactured goods. An increase in the relative price of manufacturing varieties can lead to a decline in total industrial output in our framework, i.e., to de-industrialisation.The two key mechanisms behind this surprising result are that the founding of firms requires skilled labour as a fixed input requirement, and that the price increase can raise the profit margin in the manufacturing industry and thereby induce firm entry. When the manufacturing sector mainly adjusts at the extensive margin,we refer to this industry as being entrepreneurial. Due to the fixed input requirement entry reduces the effective endowment of skilled labour available for production.This reduces industrial output owing to a novel generalized version of the Rybczynski effect. De-industrialisation occurs if that effect is sufficiently large in comparison with the standard output price effect for a given number of firms. Furthermore we prove the counterintuitive result that de-industrialisation implies a fall in the output per firm and under plausible conditions a rise in welfare. Our results shed new light on the current debates about possible causes of premature de-industrialisation and its welfare effects.
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Bibliographic InfoPaper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0101.
Length: 27 pages
Date of creation: Mar 2009
Date of revision:
Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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- NEP-ALL-2009-04-25 (All new papers)
- NEP-CSE-2009-04-25 (Economics of Strategic Management)
- NEP-MIC-2009-04-25 (Microeconomics)
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