Technical Report On measuring welfare changes when varieties are endogenous

BEHRENS, Kristian  ,  KANEMOTO, Yoshitsugu  ,  MURATA, Yasusada

16-262016-12 , GRIPS Policy Research Center
Extant studies take it for granted that there is a one-to-one mapping from a change in the equilib- rium allocation to a change in welfare. We show that such a premise does not apply to fairly standard mod- els of monopolistic competition. For any change in the equilibrium allocation, there exist an infinite number of possible welfare changes when the mass of varieties consumed differs between the two equilibria. Our re- sults thus reveal a fundamental difficulty in measuring welfare changes when varieties are endogenous.
JEL Classification Codes: L13, D60

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