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

Author

Listed:
  • Been-Lon Chen

    () (Academia Sinica)

  • Yu-Shan Hsu

    () (National Chung Cheng University)

  • Kazuo Mino

    () (Kyoto University)

Abstract

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.

Suggested Citation

  • Been-Lon Chen & Yu-Shan Hsu & Kazuo Mino, 2012. "Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities," KIER Working Papers 824, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:824
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    References listed on IDEAS

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    Cited by:

    1. Kazuo Mino & Yasuhiro Nakamoto, 2016. "Heterogeneous conformism and wealth distribution in a neoclassical growth model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(4), pages 689-717, October.
    2. Kazuo MIno & Yasuhiro Nakamoto, 2014. "Conformism and Wealth Distribution," KIER Working Papers 901, Kyoto University, Institute of Economic Research.
    3. Kazuo Mino, 2017. "Sunspot-Driven Business Cycles: An Overview," KIER Working Papers 973, Kyoto University, Institute of Economic Research.
    4. Barnett, Richard & Bhattacharya, Joydeep & Bunzel, Helle, 2016. "The Fight-or-Flight Response to the Joneses," School of Economics Working Paper Series 2016-12, LeBow College of Business, Drexel University.

    More about this item

    Keywords

    two-sector model; consumption externalities; efficiency; indeterminacy;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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