Animal spirits, competitive markets, and endogenous growth

Abstract

This paper uses a simple model with an endogenous discount rate and linear technology to investigate whether a competitive equilibrium has a higher balanced growth path (BGP) than the social planning solution and whether the BGP is determinate or indeterminate. The implications are as follows. To start with, people with an instinct to compare themselves with others possess an endogenous discount rate. In turn, this instinct affects the economic growth rate in a competitive market economy. The competitive market economy also sometimes achieves higher economic growth than a social planning economy. However, the outcomes of market economy occasionally fluctuate because of the presence of the self-fulfilling prophecy or animal spirits.