Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities

Been-Lon Chen, Yu-Shan Hsu () and Kazuo Mino
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Yu-Shan Hsu: National Chung Cheng University

No 824, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: One-sector neoclassical growth models reveal that consumption externalities lead to inefficient allocation in a steady state and indeterminate equilibrium toward the steady state only if there is a labor-leisure tradeoff. This paper shows that in a two-sector neoclassical growth model, even without a labor-leisure tradeoff, consumption spillovers easily lead to inefficient allocation in a steady state and indeterminate equilibrium toward the steady state. Consumption spillovers that yield over-accumulation of capital in an otherwise identical one-sector model may lead to under-accumulation of capital in two-sector models depending on relative capital intensities and relative degrees of externalities. Moreover, a two-sector model economy with consumption externalities is less stabilized than an otherwise identical one-sector model economy with consumption externalities.

Keywords: two-sector model; consumption externalities; efficiency; indeterminacy (search for similar items in EconPapers)
JEL-codes: E21 E32 O41 (search for similar items in EconPapers)
Pages: 36pages
Date: 2012-06
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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http://www.kier.kyoto-u.ac.jp/DP/DP824.pdf (application/pdf)

Related works:
Journal Article: WELFARE IMPLICATIONS AND EQUILIBRIUM INDETERMINACY IN A TWO-SECTOR GROWTH MODEL WITH CONSUMPTION EXTERNALITIES (2015)
Working Paper: Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities (2013)
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