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Costs of Low Productivity: Intensive and Extensive Margins

  • goksel, turkmen

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.

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File URL: http://mpra.ub.uni-muenchen.de/40804/1/MPRA_paper_40804.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40804.

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Date of creation: Jan 2012
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Handle: RePEc:pra:mprapa:40804
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