Working Paper: CEPR ID: DP10748
Authors: Simon P. Anderson; Andr de Palma
Abstract: We link fundamental technological and taste distributions to endogenous economic distributions of firm size (output, profit) and prices in extensions of canonical IO and Trade models. We develop a continuous logit model of monopolistic competition to show that exponential or normal distributions respectively generate Pareto or log-normal economic size distributions. Two groups of distributions (output, profit, and quality-cost; and price and cost) are linked through the technological relation between cost and quality-cost. We formulate a general monopolistic competition model and recover the demand structure, mark-ups, and the quality-cost distribution from the output and profit distributions. Adding the price distribution recovers the cost distribution and the relation between quality-cost and cost. We also find long-run equilibrium distributions as a function of the primitives. On the Trade side, we provide a parallel analysis for the CES and break the Pareto circle by introducing quality.
Keywords: CES; general monopolistic competition model; logit; Pareto; lognormal distribution; price and profit dispersion; primitive and economic distributions
JEL Codes: L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quality-cost distribution (D39) | profit distribution (D33) |
| cost distribution (power) + quality-cost distribution (exponential) (D39) | profit distribution (Pareto) (D33) |
| quality-cost distribution (D39) | equilibrium output distribution (D39) |
| quality in demand model breaks Pareto circle (C69) | wider variety of distribution forms (D39) |