A two-sector OLG economy: economic growth and demographic behaviour

Abstract

We analyse an overlapping generations economy with two sectors of production: a capital-intensive commodity sector and a labour-intensive services sector. First, we consider an economy with exogenous population and study the effects of a change in the individual preference for old-aged services that causes a reallocation of labour between sectors on per capita income. Then, we compare the results with the standard Diamond (1965) style one-sector economy. Second, we endogenise fertility founding that a reallocation of labour in favour of the services sector causes an additional beneficial effect on per capita income with respect to the model with exogenous population. Third, we further introduce endogenous lifetime through public health investments, showing that multiple regimes of development may exist. In this context, the a rise in the preference for old-aged services may help escaping from poverty.