Pollution effects on labor supply and growth

Abstract

Abstract Recent empirical contributions have observed a significant negative impact of pollution on labor supply. These impacts have been largely ignored in the theoretical literature, which has focused on the effects of pollution on consumption demand. In this paper we study the short‐ and long‐run effects of pollution in a Ramsey model where pollution and labor supply are non‐separable arguments in households’ preferences. We determine sufficient conditions for the existence and uniqueness of a long‐term equilibrium and we show how large (negative) effects of pollution on labor supply may promote macroeconomic volatility (deterministic cycles near the steady state) through a flip bifurcation.