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A two-sector model of endogenous growth with leisure externalities

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  • Costas Azariadis
  • Been-Lon Chen
  • Chia-Hui Lu
  • Yin-Chi Wang

Abstract

This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a Lucas [12] type model, as in Gómez [7], with a separable non-homothetic utility and the assumption that physical and human capital are both necessary inputs in both the goods and the education sectors. In spite of the non-concavities due to the leisure externality, the balanced growth path is always unique, which guarantees global stability for comparative-static exercises. We find that small differences in preferences toward leisure or in leisure externalities can generate substantial differences in hours worked and growth, which may play a significant role in explaining differences in growth paths between the US and Europe, in addition to the mechanisms uncovered in Prescott [16] relying on differing marginal tax rates on labor income. Our model indicates, however, that a higher preference for leisure or leisure externality implies less growth but also less education attainment, which seems counterfactual.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-045.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-045

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Keywords: Labor supply ; Economic growth;

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  1. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
  2. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  3. Eric W. Bond & Ping Wang & Chong K. Yip, 1993. "A general two-sector model of endogenous growth with human and physical capital: balanced growth and transitional dynamics," Research Paper 9324, Federal Reserve Bank of Dallas.
  4. Manuel A. Gómez, 2008. "Consumption And Leisure Externalities, Economic Growth And Equilibrium Efficiency," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(2), pages 227-249, 05.
  5. Edward C. Prescott, 2003. "Why do Americans work so much more than Europeans?," Staff Report 321, Federal Reserve Bank of Minneapolis.
  6. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  7. Ladron-de-Guevara, Antonio & Ortigueira, Salvador & Santos, Manuel S, 1999. "A Two-Sector Model of Endogenous Growth with Leisure," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 609-31, July.
  8. Gali, Jordi, 1994. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 1-8, February.
  9. Mino, Kazuo, 1996. "Analysis of a Two-Sector Model of Endogenous Growth with Capital Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 227-51, February.
  10. Ladron-de-Guevara, Antonio & Ortigueira, Salvador & Santos, Manuel S., 1997. "Equilibrium dynamics in two-sector models of endogenous growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 115-143, January.
  11. Benhabib Jess & Perli Roberto, 1994. "Uniqueness and Indeterminacy: On the Dynamics of Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 63(1), pages 113-142, June.
  12. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  13. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
  14. Mulligan, C.B. & Sala-i-Martin, X., 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," Papers 651, Yale - Economic Growth Center.
  15. John W. Kendrick, 1976. "The Formation and Stocks of Total Capital," NBER Books, National Bureau of Economic Research, Inc, number kend76-1, octubre-d.
  16. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 203-235, April.
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Cited by:
  1. Chang, Ming-Jen & Chang, Juin-Jen & Shieh, Jhy-Yuan, 2014. "Keeping up with the Joneses and exchange rate volatility in a Redux model," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 569-584.
  2. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa & Modesto, Leonor, 2014. "Employment Dynamics and Redistributive Policies under Workers' Social Norms," IZA Discussion Papers 7888, Institute for the Study of Labor (IZA).
  3. Leonardo Becchetti & Elena Giachin Ricca & Alessandra Pelloni, 2012. "The Relationship Between Social Leisure and Life Satisfaction: Causality and Policy Implications," Social Indicators Research, Springer, vol. 108(3), pages 453-490, September.

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