A Dynamic Game Model Of Endogenous Growth With Consumption Externalities

This paper introduces consumption externalities into an endogenous growth model of general capital accumulation and characterizes balanced growth equilibria. Contrary to the common argument in previous studies, the authors show that the growth rate in a feedback Nash equilibrium can be higher than that in an open-loop Nash equilibrium if agents strongly admire others' consumption. In the literature on commons games, it is usually argued that the lack of agents' commitment to their future actions leads to the so-called tragedy of the commons; that is, if agents condition their actions on the basis of the aggregate stock of the commons, rather than commit to their initial decisions, then it could worsen the overconsumption and/or underinvestment of the commons.