Growth and imperfect competition on factor markets: Increasing returns anddistribution

Although seldom modeled outside the monopolistic competition framework, mar ket incompleteness and imperfect competition are central to the new growth theories. We propose here a strategic model of imperfect competition with e ndogenous growth and endogenous market structure where we focus on labor ma rket issues. For growth to be possible, we assume increasing returns at the firm level. Due to heterogeneity on the labor market, the market structure is not degenerate. Then, because of increasing returns, short-run efficien cy is maximized under monopoly and free entry implies too many firms in the market. However, in the long run competition can generate growth through a distribution effect, whereas a monopoly leads to a zero-growth steady stat e. Thus, there is a trade-off between static and dynamic efficiency. This t rade-off implies the existence of a growth-maximizing degree of competition in our economy. (C) 2000 Elsevier Science B.V. All rights reserved. JEL cl assification: J42; L16; O41.