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

Published online by Cambridge University Press:  21 October 2014

Been-Lon Chen ,
Yu-Shan Hsu  and
Kazuo Mino
Been-Lon Chen*
Affiliation:
Academia Sinica
Yu-Shan Hsu
Affiliation:
National Chung Cheng University
Kazuo Mino
Affiliation:
Institute of Economic Research, Kyoto University
*
Address correspondence to: Been-Lon Chen, Institute of Economics, Academia Sinica, 128 Academia Road Section 2, Taipei 11529, Taiwan; e-mail: bchen@econ.sinica.edu.tw.
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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.

Keywords

Two-Sector ModelConsumption ExternalitiesEfficiencyIndeterminacy
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 3 , April 2015 , pp. 535 - 577
Copyright
Copyright © Cambridge University Press 2014 

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