Dixit-Stiglitz-Krugman Model with Investments in R&D

Abstract

We study a monopolistic competition model in the open economy case. The utility of consumers is additive separable. The producers can choose the technology (R&D) endogenously. We examine the local comparative statics of market equilibrium with respect to transport cots (of iceberg type). Early, we find the following preliminary result: increasing transport cost has opposite impacts on the mass of firms and productivity. In the present paper, we study, mainly, the local comparative statics w.r.t. transport costs for the case of autarky (the very big transport costs). For the case of linear production costs, the known (and counter-intuitive!) result is that the social welfare increases near autarky. We generalize this result for the model with investments in R&D, this is the main result of the paper.