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

In one-sector neoclassical growth models, consumption externalities lead to an inefficient allocation in a steady state and indeterminate equilibrium toward a 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 an inefficient allocation in a steady state and indeterminate equilibrium toward a steady state. Negative consumption spillovers that yield over-accumulation of capital in a one-sector model may lead to under-accumulation or an over-accumulation of capital in two-sector models depending on the relative capital intensity between sectors. Moreover, a two-sector model economy with consumption externalities is less stabilized than an otherwise identical one-sector model economy.

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Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 13-A008.

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Length: 45 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:sin:wpaper:13-a008
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