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Macroeconomics with endogenous markups and optimal taxation

Author

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  • Federico Etro

    (Ca Foscari University of Venice, Department of Economics)

Abstract
The neoclassical macroeconomic framework is extended to general preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle, market inefficiencies and optimal corrective taxation. When markups are endogenously countercyclical the impact of shocks on consumption and labor supply is magnified through new intertemporal substitution mechanisms, and the optimal fiscal policy requires a countercyclical labor income subsidy and a capital income tax that is positive along the growth path and converging to zero in the long run. With an endogenous number of goods and strategic interactions, entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize the equilibrium dynamics and derive explicit tax rules for a variety of intratemporal preference aggregators including the quadratic, directly additive, indirectly additive and homothetic classes.

Suggested Citation

  • Federico Etro, 2016. "Macroeconomics with endogenous markups and optimal taxation," Working Papers 2016:32, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2016:32
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Etro, Federico, 2020. "Technological Foundations for Dynamic Models with Endogenous Entry," European Economic Review, Elsevier, vol. 128(C).
    2. Savagar, Anthony & Dixon, Huw, 2020. "Firm entry, excess capacity and endogenous productivity," European Economic Review, Elsevier, vol. 121(C).
    3. Cavallari, Lilia, 2022. "The international real business cycle when demand matters," Journal of Macroeconomics, Elsevier, vol. 73(C).
    4. Paolo Bertoletti & Federico Etro, 2022. "Monopolistic competition, as you like it," Economic Inquiry, Western Economic Association International, vol. 60(1), pages 293-319, January.
    5. Etro, Federico, 2019. "The Romer model with monopolistic competition and general technologies," Economics Letters, Elsevier, vol. 181(C), pages 1-6.
    6. Cavallari, Lilia & Etro, Federico, 2020. "Demand, markups and the business cycle," European Economic Review, Elsevier, vol. 127(C).
    7. Cheng-wei Chang & Ching-chong Lai, 2021. "Optimal fiscal policies and market structures with monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1385-1411, December.
    8. Kushnir, Alexey & Tarasov, Alexander & Zubrickas, Robertas, 2021. "On equilibrium in monopolistic competition with endogenous labor," Economics Letters, Elsevier, vol. 201(C).
    9. Eren Gürer, 2022. "Rising markups and optimal redistributive taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1227-1259, October.
    10. Etro, Federico, 2023. "Technologies for endogenous growth," Journal of Mathematical Economics, Elsevier, vol. 105(C).
    11. Alexander Tarasov & Robertas Zubrickas, 2021. "Optimal Income Taxation under Monopolistic Competition," CESifo Working Paper Series 9309, CESifo.
    12. Alexander Tarasov & Robertas Zubrickas, 2023. "Optimal income taxation under monopolistic competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(2), pages 495-523, August.
    13. Lilia Cavallari & Federico Etro, 2017. "Demand, Markups and the Business Cycle. Bayesian Estimation and Quantitative Analysis in Closed and Open Economies," Working Papers 2017:09, Department of Economics, University of Venice "Ca' Foscari".
    14. Gilad Sorek, 2024. "Schumpeterian Growth with Variable Demand Elasticity," Auburn Economics Working Paper Series auwp2024-04, Department of Economics, Auburn University.

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    More about this item

    Keywords

    Monopolistic competition; variable markups; optimal taxation; business cycles;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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