Sustainable Endogenous Growth and Consumption Inertia: Old habits die hard

Abstract

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 influence the stock of environmental capital? Second, does habit-formation affects 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.