Working Paper: CEPR ID: DP13946
Authors: Kristian Behrens; Sergey Kichko; Philip Ushchev
Abstract: We analyze multisector models with endogenous product variety and derive general results on the magnitude of welfare changes due to sector-specific price shocks. Intersectoral linkages magnify or dampen these shocks, depending on complementarity or substitutability in consumers’ preferences. Under the widely used combination of Cobb-Douglas-CES utilities and monopolistic competition, intersectoral linkages disappear. This does not hold with more general preferences or market structures, where sector-specific price shocks that are a priori welfare improving can turn out to be welfare worsening economy-wide. We illustrate this result with several examples, in particular where one sector is ‘granular’ and the other is monopolistically competitive.
Keywords: intersectoral linkages; sectoral shocks; welfare changes; complementarity; substitutability
JEL Codes: D11; D43; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive productivity shock in one sector (O49) | Welfare gains in the economy (if goods are gross complements) (D69) |
| Positive productivity shock in one sector (O49) | Welfare losses (if goods are gross substitutes) (D69) |
| Cobb-Douglas preferences (D11) | Welfare gains from sector shock (D69) |
| Market structure (monopolistic or oligopolistic) (L11) | Welfare implications of sector-specific shocks (D69) |