Capital inflow in the presence of endogenous labour supply and monopolistic competition

Abstract

This paper examines the impact of capital mobility within the context of a simple general equilibrium model where the supply of labour is endogenous and the producer services sector is subject to monopolistic competition. It is shown that the presence of monopolistic competition influences the size of all comparative static results. The paper also shows that the size of the elasticity of substitution between leisure and consumption of the final good plays a crucial role in determining the impact of changes in the supply of capital on utility-maximising labour supply and welfare. Specifically, it is shown that capital mobility has no impact on optimal labour supply if the elasticity of substitution is equal to unity. The impact of a small capital inflow on welfare can be negative if the elasticity of substitution is sufficiently larger than unity.