Economic growth with brown or green capital

Abstract

We study a discrete-time growth model where capital affects the productivity of other firms and can therefore be “brown” or “green”. Brown inputs, decreasing productivity, are a negative externality, while green inputs, whether human or natural, increasing productivity, are a positive externality. We prove the existence of self-consistent externalities before the existence of a competitive equilibrium, and the occurrence of two-period cycles through bifurcation analysis. In particular, externalities lead to cycles: when negative, under dominant income effects; when positive, under dominant substitution effects.