De-Industrialisation, Entrepreneurial Industries and Welfare

27 Pages Posted: 20 Apr 2009 Last revised: 23 Oct 2009

See all articles by Albert G. Schweinberger

Albert G. Schweinberger

University of Konstanz - Faculty of Economics and Statistics

Jens Suedekum

Heinrich-Heine-University Duesseldorf, Duesseldorf Institute for Competition Economics (DICE); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

Date Written: March 1, 2009

Abstract

We develop a two-sector general equilibrium model with monopolistic competition featuring nonhomothetic production and a variable demand elasticity for the manufactured goods. An increase in the relative price of manufacturing varieties can lead to a decline in total industrial output in our framework, i.e., to de-industrialisation. The two key mechanisms behind this surprising result are that the founding of firms requires skilled labour as a fixed input requirement, and that the price increase can raise the profit margin in the manufacturing industry and thereby induce firm entry. When the manufacturing sector mainly adjusts at the extensive margin, we refer to this industry as being entrepreneurial. Due to the fixed input requirement entry reduces the effective endowment of skilled labour available for production. This reduces industrial output owing to a novel generalized version of the Rybczynski effect. De-industrialisation occurs if that effect is sufficiently large in comparison with the standard output price effect for a given number of firms. Furthermore we prove the counterintuitive result that de-industrialisation implies a fall in the output per firm and under plausible conditions a rise in welfare. Our results shed new light on the current debates about possible causes of premature de-industrialisation and its welfare effects.

Keywords: Entrepreneurial industries, monopolistic competition, de-industrialisation, welfare effects

JEL Classification: F12, D43

Suggested Citation

Schweinberger, Albert G. and Südekum, Jens, De-Industrialisation, Entrepreneurial Industries and Welfare (March 1, 2009). Ruhr Economic Paper No. 101, Available at SSRN: https://ssrn.com/abstract=1392153 or http://dx.doi.org/10.2139/ssrn.1392153

Albert G. Schweinberger (Contact Author)

University of Konstanz - Faculty of Economics and Statistics ( email )

Universitaetsstr. 10
78457 Konstanz
Germany
++49 7531 88-2632 (Phone)
++49 7531 88-4119 (Fax)

Jens Südekum

Heinrich-Heine-University Duesseldorf, Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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