HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Outline

aHappy Degrowth vs Unhappy Growth

Ennio Bilancini(Universita di Modena e Reggio Emilia, Italy)

Simone D’Alessandro(Universita di Pisa, Italy)

still . . . work in progress

Degrowth Conference Barcelona 2010March 26-29, 2010

Barcelona

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Outline

Outline

1 Introduction

2 The model

3 Concluding Remarks

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Outline

Outline

1 Introduction

2 The model

3 Concluding Remarks

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Outline

Outline

1 Introduction

2 The model

3 Concluding Remarks

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Outline

1 Introduction

2 The model

3 Concluding Remarks

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Introduction

I The importance of economic growth to fuel well-being inrich countries is challenged by different perspectives. In thispresentation we will consider the insights from happinesseconomics.

I Recent developments in endogenous growth theory includethe effect of jealousy and keeping up with Joneses. Clearly,the outcome of the decentralized equilibrium is sub-optimal(e.g. Liu and Turnovsky, 2005).

I Antoci et al. (2004) present an endogenous growth modelwhere individual utility depends on consumption ofrelational goods.

I The present paper seeks to contribute to this debate includingboth the aspects: de-growth towards a steady statecharacterized by low or zero growth rate is an option, strictlypreferred to others.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Introduction

I The importance of economic growth to fuel well-being inrich countries is challenged by different perspectives. In thispresentation we will consider the insights from happinesseconomics.

I Recent developments in endogenous growth theory includethe effect of jealousy and keeping up with Joneses. Clearly,the outcome of the decentralized equilibrium is sub-optimal(e.g. Liu and Turnovsky, 2005).

I Antoci et al. (2004) present an endogenous growth modelwhere individual utility depends on consumption ofrelational goods.

I The present paper seeks to contribute to this debate includingboth the aspects: de-growth towards a steady statecharacterized by low or zero growth rate is an option, strictlypreferred to others.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Introduction

I The importance of economic growth to fuel well-being inrich countries is challenged by different perspectives. In thispresentation we will consider the insights from happinesseconomics.

I Recent developments in endogenous growth theory includethe effect of jealousy and keeping up with Joneses. Clearly,the outcome of the decentralized equilibrium is sub-optimal(e.g. Liu and Turnovsky, 2005).

I Antoci et al. (2004) present an endogenous growth modelwhere individual utility depends on consumption ofrelational goods.

I The present paper seeks to contribute to this debate includingboth the aspects: de-growth towards a steady statecharacterized by low or zero growth rate is an option, strictlypreferred to others.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Introduction

I The importance of economic growth to fuel well-being inrich countries is challenged by different perspectives. In thispresentation we will consider the insights from happinesseconomics.

I Recent developments in endogenous growth theory includethe effect of jealousy and keeping up with Joneses. Clearly,the outcome of the decentralized equilibrium is sub-optimal(e.g. Liu and Turnovsky, 2005).

I Antoci et al. (2004) present an endogenous growth modelwhere individual utility depends on consumption ofrelational goods.

I The present paper seeks to contribute to this debate includingboth the aspects: de-growth towards a steady statecharacterized by low or zero growth rate is an option, strictlypreferred to others.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Ingredients and results

I More precisely, we present an endogenous growth modelwhere individuals beyond private consumption and leisure,obtain their utility from:

i. the comparison of their current material situation with theiraspiration and status, and

ii. the consumption of relational goods.I We compare three different kinds of equilibria:

i. decentralized economy;ii. myopically planned economy;

iii. centrally planned economy.

I We show that the optimal balanced growth path ischaracterized by high levels of leisure and low or zero rate ofgrowth, and this cannot be obtained with laissez-faire.

I The path from the actual state to the optimal trajectory caneasily require a transition with negative rate of growth.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Ingredients and results

I More precisely, we present an endogenous growth modelwhere individuals beyond private consumption and leisure,obtain their utility from:

i. the comparison of their current material situation with theiraspiration and status, and

ii. the consumption of relational goods.I We compare three different kinds of equilibria:

i. decentralized economy;ii. myopically planned economy;

iii. centrally planned economy.

I We show that the optimal balanced growth path ischaracterized by high levels of leisure and low or zero rate ofgrowth, and this cannot be obtained with laissez-faire.

I The path from the actual state to the optimal trajectory caneasily require a transition with negative rate of growth.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Ingredients and results

I More precisely, we present an endogenous growth modelwhere individuals beyond private consumption and leisure,obtain their utility from:

i. the comparison of their current material situation with theiraspiration and status, and

ii. the consumption of relational goods.I We compare three different kinds of equilibria:

i. decentralized economy;ii. myopically planned economy;

iii. centrally planned economy.

I We show that the optimal balanced growth path ischaracterized by high levels of leisure and low or zero rate ofgrowth, and this cannot be obtained with laissez-faire.

I The path from the actual state to the optimal trajectory caneasily require a transition with negative rate of growth.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Ingredients and results

I More precisely, we present an endogenous growth modelwhere individuals beyond private consumption and leisure,obtain their utility from:

i. the comparison of their current material situation with theiraspiration and status, and

ii. the consumption of relational goods.I We compare three different kinds of equilibria:

i. decentralized economy;ii. myopically planned economy;

iii. centrally planned economy.

I We show that the optimal balanced growth path ischaracterized by high levels of leisure and low or zero rate ofgrowth, and this cannot be obtained with laissez-faire.

I The path from the actual state to the optimal trajectory caneasily require a transition with negative rate of growth.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Outline

1 Introduction

2 The model

3 Concluding Remarks

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

The utility functionI We add to the basic leisure consumption trade-off, the fact

that individuals can obtain utility from the consumption ofrelational goods:

ui = f (ci, c, li, xi) =(ci c−γ lφi xηi )1−σ

1− σ, (1)

where, c is private consumption, c is average consumption, lis leisure, x is consumption of relational goods, φ, η > 0 andσ 6= 1.

I Jealousy =⇒ γ > 0,I Keeping up with Joneses (KUJ) =⇒ σ > 1.I Relational goods x are given by:

xi = g(li,V) = liV, (2)

where, V is defined as the stock of social capital.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

The utility functionI We add to the basic leisure consumption trade-off, the fact

that individuals can obtain utility from the consumption ofrelational goods:

ui = f (ci, c, li, xi) =(ci c−γ lφi xηi )1−σ

1− σ, (1)

where, c is private consumption, c is average consumption, lis leisure, x is consumption of relational goods, φ, η > 0 andσ 6= 1.

I Jealousy =⇒ γ > 0,I Keeping up with Joneses (KUJ) =⇒ σ > 1.I Relational goods x are given by:

xi = g(li,V) = liV, (2)

where, V is defined as the stock of social capital.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

The utility functionI We add to the basic leisure consumption trade-off, the fact

that individuals can obtain utility from the consumption ofrelational goods:

ui = f (ci, c, li, xi) =(ci c−γ lφi xηi )1−σ

1− σ, (1)

where, c is private consumption, c is average consumption, lis leisure, x is consumption of relational goods, φ, η > 0 andσ 6= 1.

I Jealousy =⇒ γ > 0,I Keeping up with Joneses (KUJ) =⇒ σ > 1.I Relational goods x are given by:

xi = g(li,V) = liV, (2)

where, V is defined as the stock of social capital.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Social CapitalI Social capital changes in time.I Its dynamics depends on the average level of leisure in the

society l. The simplest way to include this complementarityin leisure is:

V = B l− δV, (3)

where B, δ > 0.I We started with this simple form, but we include

non-linearity in the “productivity” of average leisure whichdepends on the current level of social capital (networks):

V = l f (V)− δV, (4)

where f (V) takes a logistic form:

f (V) = β +θ

1 + eψ−ξV . (5)

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Social CapitalI Social capital changes in time.I Its dynamics depends on the average level of leisure in the

society l. The simplest way to include this complementarityin leisure is:

V = B l− δV, (3)

where B, δ > 0.I We started with this simple form, but we include

non-linearity in the “productivity” of average leisure whichdepends on the current level of social capital (networks):

V = l f (V)− δV, (4)

where f (V) takes a logistic form:

f (V) = β +θ

1 + eψ−ξV . (5)

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Social CapitalI Social capital changes in time.I Its dynamics depends on the average level of leisure in the

society l. The simplest way to include this complementarityin leisure is:

V = B l− δV, (3)

where B, δ > 0.I We started with this simple form, but we include

non-linearity in the “productivity” of average leisure whichdepends on the current level of social capital (networks):

V = l f (V)− δV, (4)

where f (V) takes a logistic form:

f (V) = β +θ

1 + eψ−ξV . (5)

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Social CapitalI Social capital changes in time.I Its dynamics depends on the average level of leisure in the

society l. The simplest way to include this complementarityin leisure is:

V = B l− δV, (3)

where B, δ > 0.I We started with this simple form, but we include

non-linearity in the “productivity” of average leisure whichdepends on the current level of social capital (networks):

V = l f (V)− δV, (4)

where f (V) takes a logistic form:

f (V) = β +θ

1 + eψ−ξV . (5)

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Decentralized economy

The problem

max∫ ∞

0

(ci c−γ lφi xηi )1−σ

1− σe−ρt dt (6)

s.t. ki = rki + w(1− li)− ci, (7)

ki(0) > 0 and V(0) > 0, (8)

where r and w are the “price” of capital and labour. Productionfollow a simple Romer (1986) production function:

yi = A(k)kαi (1− li)β, (9)

with A(k) = Ak1−α

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Decentralized economy

Main outcome

I The level of social capital does not affect the equilibriumallocation of time between labour and leisure.

I If we allow for the non-linear dynamics in the accumulationof social capital, two locally stable levels of V can besustained on the balanced growth path.

I Jealousy deeply affects the rate of growth and the allocationof time: γ ↑ =⇒ g ↑ =⇒ li ↓

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Decentralized economy

Main outcome

I The level of social capital does not affect the equilibriumallocation of time between labour and leisure.

I If we allow for the non-linear dynamics in the accumulationof social capital, two locally stable levels of V can besustained on the balanced growth path.

I Jealousy deeply affects the rate of growth and the allocationof time: γ ↑ =⇒ g ↑ =⇒ li ↓

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Myopically Planned Economy(MPE)

The problem

max∫ ∞

0

(c1−γi lφi xηi )1−σ

1− σe−ρt dt (10)

s.t. ki = Aki(1− li)β − ci, (11)

ki(0) > 0 and V(0) > 0, (12)

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

MPE vs Decentralized

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Centrally Planned Economy (CPE)

The problem

max∫ ∞

0

(c1−γi lφi xηi )1−σ

1− σe−ρt dt (13)

s.t. ki = Aki(1− li)β − ci, (14)

V = l f (V)− δV, (15)

ki(0) > 0 and V(0) > 0, (16)

f (V) = β +θ

1 + eψ−ξV . (17)

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

CPE vs Decentralized

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Outline

1 Introduction

2 The model

3 Concluding Remarks

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Comments

I If social planner considers the effect of average leisure on thedynamics of social capital accumulation the results change.In order to maximize the individual utility function a highershare of leisure is needed.

I Growth looses importance.

I Social planner should shift from a regime based on work forgrowth to that based on work for social capital accumulation.

I Social planner who implements public policy for growthdoes not include aspects of human life which are crucial forwell-being.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Transition

I How to change from a work for growth regime to a work forsocial capital one?

I preliminary results highlight that:• High-income countries =⇒ the level of physical capital must

decline, since it cannot be sustained in the other regime.• Low-income countries =⇒ the level of physical capital still

increases, while the working time should start decreasing.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Transition

I How to change from a work for growth regime to a work forsocial capital one?

I preliminary results highlight that:• High-income countries =⇒ the level of physical capital must

decline, since it cannot be sustained in the other regime.• Low-income countries =⇒ the level of physical capital still

increases, while the working time should start decreasing.

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Final Remarks

I We obtain this result without negative externalities of growthon social capital.

I We do not include an effect of social capital on Jealousy andKUJ.

I We do not take into account the natural environment.I All these elements and many others should be included and

would work in our direction: growth cannot be happy.I Only myopically social planners (i.e. economists) can believe

it!

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Final Remarks

I We obtain this result without negative externalities of growthon social capital.

I We do not include an effect of social capital on Jealousy andKUJ.

I We do not take into account the natural environment.I All these elements and many others should be included and

would work in our direction: growth cannot be happy.I Only myopically social planners (i.e. economists) can believe

it!

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Final Remarks

I We obtain this result without negative externalities of growthon social capital.

I We do not include an effect of social capital on Jealousy andKUJ.

I We do not take into account the natural environment.I All these elements and many others should be included and

would work in our direction: growth cannot be happy.I Only myopically social planners (i.e. economists) can believe

it!

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Final Remarks

I We obtain this result without negative externalities of growthon social capital.

I We do not include an effect of social capital on Jealousy andKUJ.

I We do not take into account the natural environment.I All these elements and many others should be included and

would work in our direction: growth cannot be happy.I Only myopically social planners (i.e. economists) can believe

it!

HappyDegrowth vs

UnhappyGrowth

E. BilanciniS. D’Alessandro

Introduction

The model

ConcludingRemarks

Final Remarks

I We obtain this result without negative externalities of growthon social capital.

I We do not include an effect of social capital on Jealousy andKUJ.

I We do not take into account the natural environment.I All these elements and many others should be included and

would work in our direction: growth cannot be happy.I Only myopically social planners (i.e. economists) can believe

it!