Growth, welfare and transitional dynamics in an endogenously growing economy with abatement labor

This paper sets up a simple endogenous growth model that highlights the importance of the endogenous labor-leisure choice and the allocation between production labor and abatement labor. We show that, in contrast to the common notion (e.g. Bovenberg, A.L., Smulders, S., 1996. Transitional impacts of environmental policy in an endogenous growth model. International Economic Review 37, 861–893] and Bovenberg, A.L., de Mooij, R.A., 1997. Environmental tax reform and endogenous growth. Journal of Public Economics 63, 207–237]), the existence of an environmental production externality is a sufficient (but not necessary) condition for environmental policies to stimulate economic growth if the labor-leisure choice is endogenously determined. In particular, since there are complementarities between public abatement and private abatement, the public abatement expenditure will have a more powerful enhancing effect on economic growth when it is accompanied by more efficient private abatement. This result also leads to a corollary to the effect that it is easier to achieve double dividends in terms of enhancing both growth and welfare if the endogenous labor-leisure choice is taken into account.In our dynamic analysis, we show that if public abatement is substantially large, dynamic indeterminacy may occur despite the absence of a positive labor externality and interestingly, this is more likely to be the case when abatement labor plays a more significant role. Besides, the transitional effects of an increase in public abatement are also investigated.