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PHYSICAL CAPITAL, HUMAN CAPITAL, AND THE HEALTH EFFECTS OF POLLUTION IN AN OLG MODEL

Published online by Cambridge University Press:  18 January 2021

Sichao Wei  and
David Aadland
Sichao Wei
Affiliation:
Hunan University
David Aadland*
Affiliation:
University of Wyoming
*
Address correspondence to: David Aadland, Department of Economics, University of Wyoming, 1000 E. University Avenue, Laramie, WY82070, USA. e-mail: aadland@uwyo.edu. Phone: (307) 766-4931.
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Abstract

In a standard overlapping generations model, we show how the health effects of pollution impact the balanced-growth path (BGP) and the transition dynamics of the economy. The key driver is the differential between physical and human capital accumulation. The differential occurs because pollution alters the incentives to save and to invest in education via reductions in longevity and alters the effectiveness of education expenditures via impaired cognitive learning. Two predictions of the model are noteworthy. The first prediction is the existence of two stable BGPs with a separating saddle path. One BGP is desirable featuring high economic growth and low pollution, whereas the other should be avoided because it is associated with low economic growth and high pollution. The second prediction is that economic and environmental cycles may emerge, implying inequality between generations. These theoretical results are supported by empirical evidence and imply a role for government to steer the economy toward the desirable BGP and eliminate the cycles.

Keywords

Endogenous GrowthOverlapping GenerationsPollutionHealth Effects
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 6 , September 2022 , pp. 1522 - 1563
Copyright
© Cambridge University Press 2021

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Footnotes

The authors thank Jason Shogren, Thorsten Janus, Sasha Skiba, Benjamin Rashford, Hangtian Xu, an associate editor of the journal, two anonymous referees, and participants at the 8th Congress of the EAAERE (Beijing 2019) for their helpful comments and suggestions. Sichao Wei also appreciates the support of the Fundamental Research Funds for the Central Universities (No. 023400/531118010241).

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