Utility and production externalities, equilibrium efficiency and leisure specification

This paper analyzes the implications that the specification of the leisure activity has on the equilibrium efficiency in a two-sector endogenous growth model with human capital accumulation. We consider external effects of consumption and leisure in utility, and sector-specific externalities associated to physical and human capital in production. The optimal tax policy to correct for the distortions caused by the externalities is characterized under all the typical leisure specifications considered in the literature: home production, quality time and raw time. We show that the optimal policy depends markedly on the leisure specification.