A Two-Sector Model of Endogenous Growth with Leisure Externalities
FRB of St. Louis Working Paper No. 2012-045A
Posted: 24 Oct 2012
Date Written: October 23, 2012
This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a Lucas  type model, as in Gómez , 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  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: Suggested Citation