On monopolistic competition and optimal product diversity: workers' rents also matter

In the Dixit-Stiglitz model of monopolistic competition, entry of rms is socially
too small. Other authors have shown that excess entry is also a possibility with other
preferences for diversity. We show that workers rents also contribute to explain
excess entry through a general equilibrium mechanism. Larger wages indeed raises
the aggregate earnings and rms sales and pro ts, which entices too many rms
to enter. We discuss the possibility of over-provision of varieties by comparing the
equilibrium to unconstrained and constrained social optima and to other regulatory
framework where wages are not controlled.