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Monopolistic Competition in OLG models: efficiency and inequality

Author

Listed:
  • Pascal Belan
  • Djob Li Ngue Bikob

    (CY Cergy Paris Université, THEMA)

Abstract

We study intergenerational and intragenerational redistribution in an overlappinggenerations economy with monopolistic competition, in which workers differ in skill and firms pay a fixed entry cost in physical capital. This capital-based fixed cost implies that greater market power raises the equilibrium real interest rate by lowering wages and aggregate saving. We characterize Pareto-efficient steady states and show that productive and dynamic efficiency require correcting the markup distortion and attaining the Golden Rule. Because skill is unobservable, however, the available fiscal instruments cannot in general decentralize an arbitrary distribution along the Pareto frontier, and financing the Pigouvian subsidy may widen wage and consumption inequality. At the second best, the capital correction remains efficient. With homogeneous time preferences, this implies the Golden Rule and leaves labor taxation as the main intragenerational redistributive instrument. With heterogeneous patience, capital policy acquires a redistributive role and the optimal allocation may depart from the Golden Rule.

Suggested Citation

  • Pascal Belan & Djob Li Ngue Bikob, 2026. "Monopolistic Competition in OLG models: efficiency and inequality," Thema Working Papers 2026-10, THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS.
    • Handle: RePEc:ema:worpap:2026-10
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    References listed on IDEAS

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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