Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/224608 
Year of Publication: 
2020
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2020: Gender Economics
Publisher: 
ZBW - Leibniz Information Centre for Economics, Kiel, Hamburg
Abstract: 
We show that the combination of monopolistic competition and input-output linkages generate what we call an input distortion. The distortion arises because material input prices involve a markup over the social opportunity cost. This has so far escaped attention in the literature addressing efficiency of monopolistic competition equilibria. Using a stylized single sector model, we provide a full description of the social optimum for an economy featuring an input-output linkage in the presence of monopolistic competition. Using this as a benchmark, we describe the allocational inefficiency of a decentralized market equilibrium as well as first-best policies to achieve efficiency. In an integrated world equilibrium, a material input subsidy and an output subsidy turn out to be perfect substitutes. A wage tax is unable to serve in offsetting the input distortion. In a cooperative policy setting with two countries, an input subsidy is a second-best policy to address the input distortion.
Subjects: 
input-output linkages
monopolistic competition
international trade
allocational inefficiency
optimal policy
JEL: 
F12
Document Type: 
Conference Paper

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