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Monopolistic Competition, Dynamic Inefficiency and Asset Bubbles

  • Femminis, Gianluca

We 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2272.

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Date of creation: Oct 1999
Date of revision:
Handle: RePEc:cpr:ceprdp:2272
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  18. Kohn, Meir & Marion, Nancy, 1993. "On dynamic efficiency in a growth model with increasing returns," Economics Letters, Elsevier, vol. 41(1), pages 93-98.
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