Distorted monopolistic competition

We develop a novel general equilibrium model of monopolistic competition in which firms and sectors are heterogeneous. Firms differ by productivity, whereas sectors differ by underlying productivity distributions and the way they enter preferences. The framework allows us to derive the directions of intra- and inter-sectoral distortions and the conditions under which those distortions arise. We finally quantify the magnitude of each type of distortions using the employment data at the firm level and the expenditure share data at the sectoral level.