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Monopoly Power, Increasing Returns to Variety, and Local Indeterminacy

  • Juin-jen Chang

    (Academia Sinica)

  • Chun-chieh Huang

    (National Chengchi University)

  • Hsiao-wen Hung

    (Tamkang University)

The required degree of increasing returns-to-scale to satisfy the Benhabib-Farmer condition for local indeterminacy is too high to be empirically plausible. In the paper, we develop a natural extension of Benhabib and Farmer's (1994, Journal of Economic Theory) model by introducing aggregation increasing returns to variety. It is shown that an increase in the degree of monopoly power can create increasing returns to an expansion in variety which decreases reliance on the degree of increasing returns-to-scale in production for generating local indeterminacy. As the degree of monopoly power increases, the required degree of increasing returns for local indeterminacy decreases monotonically. As a result, our numerical analysis indicates that the required degree of increasing returns for local indeterminacy can be easily located in the empirically plausible range. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.10.007
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 2 (April)
Pages: 384-388

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Handle: RePEc:red:issued:08-120
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  1. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 2000. " Government Spending and Welfare with Returns to Specialization," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 547-61, December.
  2. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  3. Jang-Ting Guo & Kevin J. Lansing, 2005. "Maintenance expenditures and indeterminacy under increasing returns to scale," Working Paper Series 2005-10, Federal Reserve Bank of San Francisco.
  4. Catherine J. Morrison, 1990. "Market Power, Economic Profitability and Productivity Growth Measurement: An Integrated Structural Approach," NBER Working Papers 3355, National Bureau of Economic Research, Inc.
  5. Andrew B. Bernard & Stephen Redding & Peter.K Schott, 2006. "Multi-product firms and product switching," LSE Research Online Documents on Economics 3687, London School of Economics and Political Science, LSE Library.
  6. Satyajit Chatterjee & Russell Cooper & B. Ravikumar, 1990. "Participation Dynamics: Sunspots and Cycles," NBER Working Papers 3438, National Bureau of Economic Research, Inc.
  7. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
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