Costs of Low Productivity: Intensive and Extensive Margins
This paper discusses welfare costs of a decrease in productivity and argues that there are two important channels which cause a reduction in welfare: a decrease in output per firm (intensive margin) and a decrease in number of operating firms (extensive margin). Traditional Dixit-Stiglitz monopolistic competition framework with constant elasticity of substitution utility and common productivity across firms fail to capture the extensive margin. To address this problem, this paper introduces “continuum-quadratic” utility (i.e. linear demand system) while keeping the other assumptions unchanged and finds that lowering productivity affects not only the intensive but extensive margin as well.
|Date of creation:||Jan 2012|
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