HABIT FORMATION AND PREFERENCE CHANGE IN A TWOSECTOR GROWTH MODEL WITH ELASTIC LABOR SUPPLY

The purpose of this study is to develop a two sector growth model with elastic labor supply and preference change. The preference change is influenced by the ideas of time preference and habit formation in the Ramsey-type growth theory. This study deals with interactions among capital accumulation, economic structure, labor supply, labor and capital distribution, habit formation and time preference in an integrated framework. The paper simulates the three autonomous nonlinear differential equations which determine the motion of the whole economy. The economy is demonstrated to have a unique stable equilibrium point. The comparative dynamic analysis provides some insights. For instance, as the propensity to use leisure time is more strongly affected by wage rate, the economic system is affected as follows: the habit stock of leisure time and leisure time are increased; the propensity to use leisure time is increased, the propensities to consume and to save are affected slightly; the work hours, total labour force and total capital are reduced; the output levels and two inputs of the two sectors are all reduced; the wage rate and the price of consumer goods are reduced; the GDP falls.