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Research Highlights

A Two-Sector Model of Endogenous Growth with Leisure Externalities (with Costas Azariadis, Chia-Hui Lu and Yin-Chi Wang, published in JOURNAL OF ECONOMIC THEORY in 2013)

  • Author Costas Azariadis
    Been-Lon Chen
    Chia-Hui Lu
    Yin-Chi Wang
  • Abstract This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a two-sector model 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 relying on differing marginal tax rates on labor income uncovered in existing literature. Our model indicates, however, that a higher preference for leisure or leisure externality implies less growth but also less education attainment, which seems counterfactual.
  • Link http://www.sciencedirect.com/science/article/pii/S0022053113000094(Open New Window)