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Working paper

Investments in productivity under Monopolistic Competition: Large market advantage

We study endogenous productivity in monopolistic competition with general (unspecified) utility/investment functions; a bigger investment yields smaller marginal cost. Then the equilibrium investments increase with the market size if and only if the utility (realistically) generates increasing demand elasticity and this increase can be abrupt (threshold effect). However, this technological advantage of a bigger country/city is different from a welfare advantage. To fit social optimality conditions, a governmental taxation/subsidy should be non-linear. Our extensions include comparisons among industries with different characteristics, exogenous technological progress, heterogeneous firms.