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Time-separable Utility, Leisure and Human Capital Accumulation: What New Implications for the Environment-Growth Nexus?

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  • Xavier Pautrel

    (Nantes Atlantique Université Laboratoire d’Économie et de Management de Nantes (LEMNA), Institut d’Économie et de Management de Nantes - IEA)

Abstract

Using a time-separable utility function where leisure is introduced through the disutility of working time and is adjusted for quality, as measured by human capital to capture home production, we demonstrate that the environmental policy is harmful for growth. A tighter environmental tax reduces the incentives to educate by increasing leisure time and lowers the steady-state growth rate and lifetime welfare, whatever the source of pollution. We also demonstrate that the intertemporal elasticity of substitution in labor supply plays a crucial role in the marginal impact of the environmental tax on growth and welfare. When the positive influence of human capital is added into preferences (by explicitly modelling the home production sector), we find that the environmental policy promotes steady-state growth. This result challenges the finding by Hettich (1998) according to which, in the presence of leisure, the environmental tax does not affect human capital accumulation if the source of pollution is output.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.104.

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Date of creation: Nov 2009
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Handle: RePEc:fem:femwpa:2009.104

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Keywords: Leisure; Human Capital; Environmental Tax;

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References

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  1. Xavier Pautrel, 2006. "Reconsidering The Impact of Environment on Long-Run Growth When Pollution Influences Health and Agents Have Finite-Lifetime," Working Papers 2006.93, Fondazione Eni Enrico Mattei.
  2. Steven P. Cassou & Kevin J. Lansing, 1995. "Optimal fiscal policy, public capital, and the productivity slowdown," Working Paper 9509, Federal Reserve Bank of Cleveland.
  3. Ortigueira, Salvador & Santos, Manuel S, 1997. "On the Speed of Convergence in Endogenous Growth Models," American Economic Review, American Economic Association, vol. 87(3), pages 383-99, June.
  4. Steven P. Cassou & Kevin J. Lansing, 2004. "Tax reform with useful public expenditures," Working Papers in Applied Economic Theory 98-09, Federal Reserve Bank of San Francisco.
  5. Grimaud, Andre & Tournemaine, Frederic, 2007. "Why can an environmental policy tax promote growth through the channel of education?," Ecological Economics, Elsevier, vol. 62(1), pages 27-36, April.
  6. Gian-Maria Milesi-Ferretti & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes," IMF Working Papers 95/62, International Monetary Fund.
  7. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  8. Gian Maria Milesi-Ferretti & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," Working Papers 95-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  9. Collard, Fabrice, 1998. "Spectral and persistence properties of cyclical growth," Journal of Economic Dynamics and Control, Elsevier, vol. 23(3), pages 463-488, November.
  10. Smulders, J.A. & Gradus, R.H.J.M., 1993. "The trade-off between environmental care and long-term growth: Pollution in three proto-type growth models," Open Access publications from Tilburg University urn:nbn:nl:ui:12-153405, Tilburg University.
  11. Frank Hettich, 1998. "Growth effects of a revenue-neutral environmental tax reform," Journal of Economics, Springer, vol. 67(3), pages 287-316, October.
  12. Campbell, John & Ludvigson, Sydney, 2001. "Elasticities of Substitution in Real Business Cycle Models with Home Production," Scholarly Articles 3163262, Harvard University Department of Economics.
  13. Xepapadeas, Anastasios, 2005. "Economic growth and the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 23, pages 1219-1271 Elsevier.
  14. Bovenberg, A. Lans & Heijdra, Ben J., 1998. "Environmental tax policy and intergenerational distribution," Journal of Public Economics, Elsevier, vol. 67(1), pages 1-24, January.
  15. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1996. "On the Taxation of Human and Physical Capital in Models of Endogenous Growth," CEPR Discussion Papers 1477, C.E.P.R. Discussion Papers.
  16. Hercowitz, Zvi & Sampson, Michael, 1991. "Output Growth, the Real Wage, and Employment Fluctuations," American Economic Review, American Economic Association, vol. 81(5), pages 1215-37, December.
  17. William A. Brock & M. Scott Taylor, 2004. "Economic Growth and the Environment: A Review of Theory and Empirics," NBER Working Papers 10854, National Bureau of Economic Research, Inc.
  18. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  19. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  20. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S11-44, August.
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Cited by:
  1. Basseti, Thomas & Benos, Nikos & Karagiannis, Stelios, 2010. "How policy can influence human capital accumulation and environment quality," MPRA Paper 21754, University Library of Munich, Germany.

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