A Closed-form Solution of a Two-sector Endogenous Growth Model with Habit Formation

What is it about?

This paper determines a closed-form solution of the two-sector endogenous growth model with habit formation. Differently to the paper of Hiraguchi, but similar to other approaches as those of Gomez, Turnovsky and Monteiro, we consider that the habits are formed in an external manner and enter additively into the utility function.

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Why is it important?

In this paper, we derive a closed-form solution of the Lucas two-sector endogenous growth model with habit formation. Differently to Hiraguchi (2011), we consider that the habits are formed in an external manner, as in Gomez (2014), but differently to him, habits enter additively into the utility function. This hypothesis is crucial in our approach. It solves the two problems: ensures the concavity of the utility function and enables us to obtain a unique closed-form solution that converges to the unique balanced growth path.