Hostname: page-component-848d4c4894-v5vhk Total loading time: 0 Render date: 2024-06-29T08:24:55.907Z Has data issue: false hasContentIssue false
  • English
  • Français

WELFARE IMPLICATIONS AND EQUILIBRIUM INDETERMINACY IN A TWO-SECTOR GROWTH MODEL WITH CONSUMPTION EXTERNALITIES

Published online by Cambridge University Press:  21 October 2014

Been-Lon Chen ,
Yu-Shan Hsu  and
Kazuo Mino
Been-Lon Chen*
Affiliation:
Academia Sinica
Yu-Shan Hsu
Affiliation:
National Chung Cheng University
Kazuo Mino
Affiliation:
Institute of Economic Research, Kyoto University
*
Address correspondence to: Been-Lon Chen, Institute of Economics, Academia Sinica, 128 Academia Road Section 2, Taipei 11529, Taiwan; e-mail: bchen@econ.sinica.edu.tw.
Get access Rights & Permissions [Opens in a new window]

Abstract

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 trade-off. This paper shows that in a two-sector neoclassical growth model, even without a labor–leisure trade-off, consumption spillovers easily lead to an inefficient allocation in a steady state and indeterminate equilibrium toward a steady state. Negative consumption spillovers that yield ove-accumulation of capital in a one-sector model may lead to underaccumulation or overaccumulation 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.

Keywords

Two-Sector ModelConsumption ExternalitiesEfficiencyIndeterminacy
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 3 , April 2015 , pp. 535 - 577
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abel, Andrew B. (1990) Asset prices under habit formation and catching up with the Joneses. American Economic Review 80, 38–42.Google Scholar
Abel, Andrew B. (1999) Risk premia and term premia in general equilibrium. Journal of Monetary Economics 43, 3–33.Google Scholar
Abel, Andrew B. (2005) Optimal taxation when consumers have endogenous benchmark levels of consumption. Review of Economic Studies 72, 21–42.Google Scholar
Alonso-Carrera, Jaime, Caballe, Jordi, and Raurich, Xavier (2008a) Can consumption spillovers be a source of equilibrium indeterminacy? Journal of Economic Dynamics and Control 32, 2883–2902.Google Scholar
Alonso-Carrera, Jaime, Caballe, Jordi, and Raurich, Xavier (2008b) Estate taxes, consumption externalities, and altruism. Journal of Public Economics 92, 1751–1764.Google Scholar
Alvarez-Cuadrado, Francisco, Monteiro, Goncalo, and Turnovsky, Stephen J. (2004) Habit formation, catching up with the Joneses, and non-scale growth. Journal of Economic Growth 9, 47–80.Google Scholar
Alpizar, Francisco, Carlsson, Fredrik, and Johansson-Stenman, Olof (2005) How much do we care about absolute versus relative income and consumption? Journal of Economic Behavior and Organization 56, 405–421.Google Scholar
Arrow, Kenneth J. and Dasgupta, Partha S. (2009) Conspicuous consumption, inconspicuous leisure. Economic Journal 119, 497–516.Google Scholar
Benhabib, Jess and Farmer, Roger E.A. (1994) Indeterminacy and increasing returns. Journal of Economic Theory 63, 19–41.Google Scholar
Benhabib, Jess and Farmer, Roger E.A. (1996) Indeterminacy and sector-specific externalities. Journal of Monetary Economics 37, 421–443.Google Scholar
Benhabib, Jess and Farmer, Roger E.A. (2000) The monetary transmission mechanism. Review of Economic Dynamics 3, 523–550.Google Scholar
Benhabib, Jess, Rogerson, Richard, and Wright, Randall (1992) Homework in macroeconomics: Household production and aggregate fluctuations. Journal of Political Economy 99, 1166–1187.Google Scholar
Campbell, John Y. and Cochrane, John H. (1999) By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, 205–251.Google Scholar
Carlsson, Fredrik, Johansson-Stenman, Olof, and Martinsson, Peter (2007) Do you enjoy having more than others? Survey evidence of positional goods. Economica 74, 586–598.Google Scholar
Carroll, Christopher D., Overland, Jody, and Weil, David N. (1997) Comparison utility in a growth model. Journal of Economic Growth 2, 339–367.Google Scholar
Chen, Been-Lon (2007) Multiple BGPs in a growth model with habit persistence. Journal of Money, Credit and Banking 39 (1), 25–45.Google Scholar
Chen, Been-Lon and Hsu, Mei (2007) Admiration is a source of indeterminacy. Economic Letters 95, 96–103.Google Scholar
Chen, Been-Lon, Hsu, Yu-Shan, and Mino, Kazuo (2013) Can consumption habit spillovers be a source of equilibrium indeterminacy? Journal of Economics 109 (3), 245–269.Google Scholar
Clark, Andrew E., Frijters, Paul, and Shields, Michael A. (2008) Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles. Journal of Economic Literature 46, 95–144.Google Scholar
Clark, Andrew E. and Oswald, Andrew J. (1996) Satisfaction and comparison income. Journal of Public Economics 61, 359–381.Google Scholar
Doi, Junko and Mino, Kazuo (2008) A variety-expansion model of growth with external habit formation. Journal of Economic Dynamics and Control 32, 3055–3083.Google Scholar
Duarte, Margarida and Restuccia, Diego (2010) The role of the structural transformation in aggregate productivity. Quarterly Journal of Economics 125, 129–173.Google Scholar
Dupor, Bill and Liu, Wen-Fang (2003) Jealousy and equilibrium overconsumption. American Economic Review 93, 423–28.Google Scholar
Dusenbery, James S. (1949) Income, Saving, and the Theory of Consumer Behavior. New York: Oxford University Press.Google Scholar
Easterlin, Richard (1974) Does economic growth improve the human lot? Some empirical evidence. In David, Paul A. and Reder, Melvin W. (eds.), Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, pp. 89–125. New York: Academic Press.Google Scholar
Easterlin, Richard (2001) Income and happiness: Towards a unified theory. Economic Journal 111, 465–484.Google Scholar
Farmer, Roger E.A. and Guo, Jang-Ting (1994) Real business cycles and the animal spirits hypothesis. Journal of Economic Theory 63, 42–72.Google Scholar
Fisher, Walter H. and Hof, Franz X. (2000) Relative consumption, economic growth, and taxation. Journal of Economics 72, 241–262.Google Scholar
Frank, Robert H. (2005) Positional externalities cause large and preventable welfare losses. American Economic Review 95, 137–141.Google Scholar
Gali, Jordi (1994) Keeping up with the Joneses: Consumption externalities, portfolio choice, and asset prices. Journal of Money, Credit and Banking 26, 1–8.Google Scholar
Greenwood, Jeremy and Hercowitz, Zvi (1991) The allocation of capital and time over the business cycle. Journal of Political Economy 99, 1188–1214.Google Scholar
Grishchenko, Olesya V. (2010) Internal vs. external habit formation: The relative importance for asset pricing. Journal of Economics and Business 62, 176–194.Google Scholar
Herrendorf, Berthold and Valentinyi, Akos (2008) Measuring factor income shares at the sectoral level. Review of Economic Dynamics 11, 820–835.Google Scholar
Hori, Takeo (2011) The effects of consumption externalities in an R& D-based growth model with endogenous skilled and unskilled labor supply. Journal of Economics 102, 29–55.Google Scholar
Hume, David (1748 [1955]) An Enquiry Concerning Human Understanding, reprinted. Indianapolis, IN: Bobbs-Merrill.Google Scholar
Kim, Jinill (2005) Does utility curvature matter for indeterminacy? Journal of Economic Behavior and Organization 67, 421–429.Google Scholar
Lee, Donghoon and Wolpin, Kenneth I. (2006) Intersectoral labor mobility and the growth of the service sector. Econometrica 74, 1–46.Google Scholar
Liu, Wen-Fang and Turnovsky, Stephen J. (2005) Consumption externalities, production externalities, and long-run macroeconomic efficiency. Journal of Public Economics 89, 1097–1129.Google Scholar
Ljungqvist, Lars and Uhlig, Harald (2000) Tax policy and aggregate demand management under catching up with Joneses. American Economic Review 90, 356–366.Google Scholar
Luttrmer, Erzo F.P. (2005) Neighbors as negatives: Relative earning and well-being. Quarterly Journal of Economics 120, 963–1002.Google Scholar
Marshall, Alfred (1898) Principles of Economics, 8th ed.New York: Macmillan [reprinted 1920].Google Scholar
Maurer, Jurhen and Meier, Andre (2008) Smooth it like the “Joneses”? Estimating peer-group effects in intertemporal consumption choice. Economic Journal 118, 454–476.Google Scholar
Ogaki, Masao and Reinhart, Carmen M. (1998) Measuring intertemporal substitution: The role of durable goods. Journal of Political Economy 106, 1078–1098.Google Scholar
Oswald, Andrew J. (1997) Happiness and economic performance. Economic Journal 107, 1815–1831.Google Scholar
Ravina, Enrichetta (2007) Habit Persistence and Keeping Up with the Joneses: Evidence from Micro Data. Working paper, NYU Stern School of Business.Google Scholar
Ravn, Morten, Schmitt-Grohé, Stephanie, and Uribe, Martin (2006) Deep habits. Review of Economic Studies 73, 195–218.Google Scholar
Rogerson, Richard (2008) Structural transformation and the deterioration of European labor market outcomes. Journal of Political Economy 116, 235–259.Google Scholar
Solnick, Sara J. and Hemenway, David (1998) Is more always better? A survey on positional concerns. Journal of Economic Behavior and Organization 37, 373–383.Google Scholar
Turnovsky, Stephen J. and Monteiro, Goncalo (2007) Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences. European Economic Review 51, 479–504.Google Scholar
Veblen, Thorstein (1912) The Theory of the Leisure Class. New York: Macmillan.Google Scholar
Weder, Mark (2004) A note on conspicuous leisure, animal spirits and endogenous cycles. Portuguese Economic Journal 3, 1–13.Google Scholar
Whelan, Karl (2003) A two-sector approach to modeling U.S. NIPA data. Journal of Money, Credit and Banking 35, 627–656.Google Scholar
Zabalza, Antoni, Pissarides, Christopher, and Barton, Margaret (1980) Social security and the choice between full-time work, part-time and retirement. Journal of Public Economics 14,245–276.Google Scholar