Environment in an Overlapping Generations Economy with Endogenous Labor Supply : a Dynamic Analysis

We consider an overlapping generations model with environment, where we introduce an elastic labor supply. In this framework, consumers have to choose between consumption, environmental quality and leisure. We establish that several steady states can coexist, even under a Cobb-Douglas technology, and we put in evidence a non monotonic relationship between pollution and per capita income, as suggested by the Environmental Kuznets Curve. Moreover studying local dynamics, we show the existence of deterministic cycles and endogenous fluctuations due to self-fulfilling expectations. In contrast to previous results, the occurrence of such fluctuations does not require a high emission rate of pollution. Finally, we discuss some welfare and policy implications of our results. Especially, we show that a government which would reduce pollution emissions can face a trade-off between an increase of steady state welfare and an intergenerational welfare inequality due to indeterminacy.