A Two-Sector Model of Endogenous Growth with Leisure Externalities

FRB of St. Louis Working Paper No. 2012-045A

Posted: 24 Oct 2012

See all articles by Costas Azariadis

Costas Azariadis

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Been-Lon Chen

Academia Sinica - Institute of Economics

Chia-Hui Lu

Academia Sinica

Yin-Chi Wang

The Chinese University of Hong Kong (CUHK)

Date Written: October 23, 2012

Abstract

This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a Lucas [12] type model, as in Gómez [7], with a separable non‐homothetic utility and the assumption that physical and human capital are both necessary inputs in both the goods and the education sectors. In spite of the non‐concavities due to the leisure externality, the balanced growth path is always unique, which guarantees global stability for comparative‐static exercises. We find that small differences in preferences toward leisure or in leisure externalities can generate substantial differences in hours worked and growth, which may play a significant role in explaining differences in growth paths between the US and Europe, in addition to the mechanisms uncovered in Prescott [16] relying on differing marginal tax rates on labor income. Our model indicates, however, that a higher preference for leisure or leisure externality implies less growth but also less education attainment, which seems counterfactual.

Keywords: leisure externalities, two-sector model, labor supply, economic growth

JEL Classification: O41, E24

Suggested Citation

Azariadis, Costas and Chen, Been-Lon and Lu, Chia-Hui and Wang, Yin-Chi, A Two-Sector Model of Endogenous Growth with Leisure Externalities (October 23, 2012). FRB of St. Louis Working Paper No. 2012-045A. Available at SSRN: https://ssrn.com/abstract=2166053

Costas Azariadis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Been-Lon Chen

Academia Sinica - Institute of Economics ( email )

128 Academia Road, Section 2
Nankang
Taipei, 11529
Taiwan
(02)7822791 ext. 309 (Phone)
(02)7853946 (Fax)

HOME PAGE: http://www.sinica.edu.tw/econ/namelist/mem-46e.htm

Chia-Hui Lu

Academia Sinica ( email )

Nankang
Taipei, 11529
Taiwan

Yin-Chi Wang

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong
+85291572901 (Phone)

HOME PAGE: http://yinchiwang.weebly.com

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