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

  • Been-Lon Chen (a1), Yu-Shan Hsu (a2) and Kazuo Mino (a3)

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.

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Corresponding author

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.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
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