Finite Horizon, Externalities, and Growth

Wendner, Ronald (2008): Finite Horizon, Externalities, and Growth. Unpublished.

Abstract

This paper investigates the impact of externalities on economic growth in an AK model. In contrast to the existing literature, the paper considers finitely-lived agents along the continuous time, overlapping generations literature. A series of new results, not holding for infinitely-lived agent economies, emerge. Consumption externalities generally introduce a distortion (inefficiency), even when labor supply is exogenous and there is no concurrent production externality. A negative consumption externality implies overconsumption, and growth is lower than optimal. Transition paths are considered. The model employed encompasses the infinitely-lived agent economy as a special case, thus helps understanding the differences in results between finite-horizon overlapping-generations and infinitely-lived agents economies.

• Item Type: MPRA Paper
• Language: English
• Keywords: AK growth, externality, finite lifetime, overlapping generations, optimum
• Subjects: D - Microeconomics > D9 - Intertemporal Choice and Growth > D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth; O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

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