Growth and Inequality in an Economy with Perfect and Monopolistic Competition

Chapter 14 is concerned with economic growth and income and wealth distribution in an economy characterized by co-existence of markets with perfect competition and monopoly. In modern growth theory, there are two main approaches with (proper) microeconomic foundations. Traditional neoclassical growth theory is mostly concerned with capital accumulation with economic structure but a homogeneous population (which implies no insight into income and wealth distribution among households). New dynamic economic theory is mainly concerned with perfect and monopolistic competition and knowledge creation and utilization without a proper mechanism for dealing with wealth accumulation. The two approaches failed to deal with economic growth with heterogeneous households. The unique contribution to the literature of economic growth of this chapter is integrating the basic economic mechanisms in the Walrasian general equilibrium model, the Solow one-sector growth model, and the Dixit-Stiglitz model. This chapter constructs the growth model of heterogenous households under perfect competition and monopolistic competition and analyzes properties of the economy and simulates the economic system. It shows the effects of changes in the elasticity of substitution between two varieties, the fixed labor cost of the middle goods firm, variety of middle goods, the total productivity of the final goods sector, group 1’s propensity to consume middle goods, group 1’s propensity to save, group 3’s human capital, group 3’s population, and the profit distribution.