The welfare cost of monopolistic competition: a quantitative assessment

This paper quantifies the welfare cost of monopolistic competition in a simple parametric class of endogenous growth models, embedding the neoclassical growth framework as a special case. We put particular emphasis on taking transitional dynamics into account. In doing so, we develop an original two-step numerical procedure to compute the value function. We find for conservative calibrations that the welfare cost of monopolistic competition can be anywhere between 0.4 and 1.2% of consumption, depending on whether labor is elastically or inelastically supplied.