Sector-Specific Externalities and Endogenous Growth under Social Constant Returns∗

By examining two-sector models of endogenous growth with phys-ical and human capital, this paper demonstrates that indeterminacy of equilibrium may emerge even in the absence of social increasing returns. The first model we examine assumes that both final good and new human capital production sectors employ physical as well as human capital under social constant returns but private decreasing returns due to the presence of sector-specific externalities. It is shown that a small divergence between private and social factor intensity conditions generates indeterminacy of equilibrium rather easily even under constant returns. I addition, we show that introducing endoge-nous labor supply may enhance the possibility of indeterminacy. Some extensions and intuitive interpretation of the indeterminacy conditions are also presented. ∗I wish to thank Jess Benhabib, Takashi Kamihigashi and Kazuo Nishimura for valu-able comments and suggestions on my eralier studies on which the present paper depends. I am also grateful to Junichi Itaya, Akiomi Kitagawa, Koichi Futagami, Hiroshi Ono, Aki-hisa Shibata, Makoto Saito, Akira.Yakita and seminer participants at the Macroeconomics Workshop, Chukyo Universiy, and Hokkaido University for their helpful comments. Finan-cial support from Ministry of Education, Science and Culture is gratefully acknowleded