Natural Disasters in a Two-Sector Model of Endogenous Growth

41 Pages Posted: 13 Nov 2010

See all articles by Ryo Horii

Ryo Horii

Osaka University - Institute of Social and Economic Research

Masako Ikefuji

University of Tsukuba

Date Written: November 10, 2010

Abstract

Using an endogenous growth model with physical and human capital accumulation, this paper considers the sustainability of economic growth when the use of a polluting input (e.g., fossil fuels) intensifies the risk of capital destruction through natural disasters. We find that growth is sustainable only if the tax rate on the polluting input increases over time. The long-term rate of economic growth follows an inverted V-shaped curve relative to the growth rate of the environmental tax, and it is maximized by the least aggressive tax policy from among those that asymptotically eliminate the use of polluting inputs. Moreover, welfare is maximized under an even milder environmental tax policy, especially when the pollutants accumulate gradually.

Keywords: human capital, global warming, environmental tax, endogenous depreciation, nonbalanced growth path

JEL Classification: O41, H23, Q54

Suggested Citation

Horii, Ryo and Ikefuji, Masako, Natural Disasters in a Two-Sector Model of Endogenous Growth (November 10, 2010). Yale Economics Department Working Paper No. 86; Yale University Economic Growth Center Discussion Paper No. 992. Available at SSRN: https://ssrn.com/abstract=1707042

Ryo Horii (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

1-1 Yamadaoka
Suita, Osaka 565-0871
Japan
+81 6 6879 8552 (Phone)
+81 6 6879 8583 (Fax)

HOME PAGE: http://econ.jpn.org/horii/

Masako Ikefuji

University of Tsukuba ( email )

Tsukuba University , Ibaraki Ken
Tsukuba, Ibaraki 305-8573, Ibaraki 3050006
Japan

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