A Two Sector Model of Endogenous Growth with Habit Formation

In this paper, we study an endogenous growth model with physical and human capital in which consumption habits enter the utility function multiplicatively. We show that, although the utility function with multiplicative habits is nonconcave and unbounded, an interior optimal growth path still exists, it is uniquely determined and it converges to a balanced growth path. We also \u85nd that the optimal path is saddle path stable in the neighborhood of the balanced growth path