WELFARE IMPLICATIONS AND EQUILIBRIUM INDETERMINACY IN A TWO-SECTOR GROWTH MODEL WITH CONSUMPTION EXTERNALITIES

Been-Lon Chen, Yu-Shan Hsu and Kazuo Mino

Macroeconomic Dynamics, 2015, vol. 19, issue 3, 535-577

Abstract: In one-sector neoclassical growth models, consumption externalities lead to an inefficient allocation in a steady state and indeterminate equilibrium toward a steady state only if there is a labor–leisure trade-off. This paper shows that in a two-sector neoclassical growth model, even without a labor–leisure trade-off, consumption spillovers easily lead to an inefficient allocation in a steady state and indeterminate equilibrium toward a steady state. Negative consumption spillovers that yield ove-accumulation of capital in a one-sector model may lead to underaccumulation or overaccumulation of capital in two-sector models, depending on the relative capital intensity between sectors. Moreover, a two-sector model economy with consumption externalities is less stabilized than an otherwise identical one-sector model economy.

Date: 2015
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Related works:
Working Paper: Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities (2013)
Working Paper: Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:19:y:2015:i:03:p:535-577_00

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