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Finite Horizon, Externalities, and Growth

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  • Wendner, Ronald

Abstract

This paper investigates the impact of externalities on economic growth in an AK model. In contrast to the existing literature, the paper considers finitely-lived agents along the continuous time, overlapping generations literature. A series of new results, not holding for infinitely-lived agent economies, emerge. Consumption externalities generally introduce a distortion (inefficiency), even when labor supply is exogenous and there is no concurrent production externality. A negative consumption externality implies overconsumption, and growth is lower than optimal. Transition paths are considered. The model employed encompasses the infinitely-lived agent economy as a special case, thus helps understanding the differences in results between finite-horizon overlapping-generations and infinitely-lived agents economies.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8248.

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Date of creation: 01 Jan 2008
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Handle: RePEc:pra:mprapa:8248

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Keywords: AK growth; externality; finite lifetime; overlapping generations; optimum;

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  1. Caballero, R.J. & Lyons, R.K., 1989. "Internal Versus External Economies In European Industry," Discussion Papers, Columbia University, Department of Economics 1989_10, Columbia University, Department of Economics.
  2. Olof Johansson-Stenman & Fredrik Carlsson & Dinky Daruvala, 2002. "Measuring Future Grandparents" Preferences for Equality and Relative Standing," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(479), pages 362-383, April.
  3. Christopher D Carroll & Jody Overland & David N Weil, 1997. "Comparison Utility in a Growth Model," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 387, The Johns Hopkins University,Department of Economics.
  4. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(3), pages 963-1002, August.
  5. Turnovsky, Stephen J. & Monteiro, Goncalo, 2007. "Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences," European Economic Review, Elsevier, Elsevier, vol. 51(2), pages 479-504, February.
  6. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  7. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 27(1), pages 35-47, June.
  8. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2005. "How much do we care about absolute versus relative income and consumption?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 56(3), pages 405-421, March.
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Cited by:
  1. Ronald Wendner, 2009. "Conspicuous Consumption and Overlapping Generations?," EERI Research Paper Series EERI_RP_2009_05, Economics and Econometrics Research Institute (EERI), Brussels.
  2. Wendner, Ronald, 2010. "Conspicuous consumption and generation replacement in a model of perpetual youth," Journal of Public Economics, Elsevier, Elsevier, vol. 94(11-12), pages 1093-1107, December.

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