Externalities in a Model of Perpetual Youth with Age-Dependent Productivity

Ron Wendner

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the effects of (``keeping up with the Joneses'' and ``learning-by-investing'') externalities, when labor productivity decreases with age. Within the framework of a continuous time overlapping generations model, the effects of the consumption externality on the propensity to consume, capital level and individual consumption growth rates are ambiguous and depend on the presence (absence) and sign of the ``generation replacement effect'' (GRE). The sign of the GRE is determined by the rate at which labor productivity declines. Both externalities generate distortions --- even with exogenous labor supply. Depending on the sign of the GRE, in case of a production externality, the consumption externality may raise efficiency by introducing an additional distortion. For a specific rate of labor productivity decline the GRE vanishes. In this case, externalities display the same effects in both a representative agent and the overlapping generations model.

Keywords: Externality; labor productivity; overlapping generations; perpetual youth; distortion, growth (search for similar items in EconPapers)
JEL-codes: D91 E21 O40 (search for similar items in EconPapers)
Date: 2008-10-31
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:11335

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