Analysis of a Two-Sector Model of Endogenous Growth with Capital Income Taxation

Abstract

This paper demonstrates that preference structure may play a pivotal role in generating indeterminacy in the stylized model of endogenous growth.By examining two-sector models of endogenous growth with human capital formation, we show that if the utility function of the representative family is not additively separable between consumption and pure leisure time, indeterminacy may hold even if production technologies satisfy social constant returns.We also examine models with quality leisure in which leisure activities require human capital as well as time.In contrast to the pure-leisure time model, we find that the quality-leisure time model generally needs increasing returns to scale technologies to generate indeterminacy.It is also shown that nonseparability of utility function is crucial for generating indeterminacy in the quality leisure model as well.