A large literature emphasizes that distortions misallocate resources across firms and are a key source of productivity losses. This paper examines the dynamic effects of distortions when they affect not only the allocation of resources but also firm-level incentives to improve productivity. I...

I develop a model of monopolistic competition in which I distinguish between niche markets and mass markets, in the spirit of Holmes and Stevens, 2014. Firms choose between entering a small niche market with high markups or a large mass market with low markups. Entry costs and other distortions...