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Sustainable endogenous growth and consumption inetia: old habits die hard

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Summary:In this paper we study an endogenous growth model with habit-formation and address two questions that are, to the best of our knowledge, new for the sustainable endogenous growth literature: first, does the process of habit-formation in‡uence the stock of environmental capital? Second, does habitformation a¤ects the long-term rate of economic growth? Using a simple and standard structure of the endogenous growth models, we first show that there may be multiple equilibria, not all stable. Second, the presence of habits in relation to the consumption goods lowers the long term equilibrium level of natural capital and the growth rate of the economy. Third, we highlight the possibility of "win-win" situations. Finally, we show that the presence of habits reduces the effectiveness of any environmental policy that is meant to improve environmental quality. In particular, the stronger the inertia effect, the lesser will be the equilibrium levels of natural capital and the greater will be the net flow of pollutant emissions. At the same time, the economy will grow at a lower rate.
Main Authors:Belbute, José
Other Authors:Brito, Paulo
Subject:Endogenous Growth Sustainability Environmental Preservation Habit- Formation
Year:2005
Country:Portugal
Document type:working paper
Access type:open access
Associated institution:Universidade de Lisboa
Language:English
Origin:Repositório da Universidade de Lisboa

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