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Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities

  • Been-Lon Chen

    ()

    (Academia Sinica)

  • Yu-Shan Hsu

    ()

    (National Chung Cheng University)

  • Kazuo Mino

    ()

    (Kyoto University)

One-sector neoclassical growth models reveal that consumption externalities lead to inefficient allocation in a steady state and indeterminate equilibrium toward the steady state only if there is a labor-leisure tradeoff. This paper shows that in a two-sector neoclassical growth model, even without a labor-leisure tradeoff, consumption spillovers easily lead to inefficient allocation in a steady state and indeterminate equilibrium toward the steady state. Consumption spillovers that yield over-accumulation of capital in an otherwise identical one-sector model may lead to under-accumulation of capital in two-sector models depending on relative capital intensities and relative degrees of externalities. Moreover, a two-sector model economy with consumption externalities is less stabilized than an otherwise identical one-sector model economy with consumption externalities.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP824.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 824.

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Length: 36pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:kyo:wpaper:824
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