Externality in labor supply and government spending

Patrick Fève, Julien Matheron, and Jean-Guillaume Sahuc


Standard business cycle models face difficulties generating (i) government spending multipliers exceeding unity and (ii) stabilizing effects of government size. Using a simple model with externality in labor supply, we show that a sufficient degree of complementarity between aggregate and private labor supplies is key to reproducing these stylized facts.


Externality; Labor supply; Government spending multiplier; Government size;

JEL codes

  • E32: Business Fluctuations • Cycles
  • E63: Comparative or Joint Analysis of Fiscal and Monetary Policy • Stabilization • Treasury Policy

Published in

Economics Letters, Elsevier, vol. 112, n. 3, September 2011, pp. 273–276