Sep 21, 2008

Articles in journals

Brito, P., Belbute, J.

6

21

This paper studies an endogenous growth model with habit-formation and addresses two questions that are new to the sustainable endogenous growth literature. First, does the process of habit-formation in relation to the consumption of manufactured goods influence the stock of environmental capital ? Second, does the habit-formation affect the long-term rate of economic growth ? Using a simple structure of an endogenous growth model, it is shown that there may be multiple equilibria, though not all stable. Next, it is proved that the presence of habits in relation to the manufactured goods, lowers the steady state level of environmental capital. However, the effect on the endogenous growth depends on the intertemporal elasticity of consumption substitution. In particular, an increase in the strength of habits will result in a higher endogenous output growth rate, if the substitution between intertemporal consumption is elastic. On the other hand, a change in preferences towards a cleaner environment increases the steady state level of natural capital. However, the presence of habits reduces the effectiveness of any public policy that is meant to increase the social value of the environment in utility.

Endogenous Growth,Sustainability,Environmental Preservation,Habit-Formation