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Advertising is a sizeable industry in most industrialized countries. Per capita advertising expenditures have constantly grown during the second half of the last century. In terms of resources invested in advertising, there exist also substantial vari- ation across countries. This paper studies whether and how advertising can affect the aggregate economy. The issue is explored by introducing advertising in an otherwise standard neoclassical growth model. Quantitatively, advertising substantially affects the steady state only when the labor supply is allowed to be endogenous. In this case, by calibrating the model on the US data, we find that the presence of advertising re- sults in a higher level of hours worked, output consumption. Also, our model predicts that advertising can be potentially important in explaining the observed differences in hours worked between the US and European countries. Finally, the welfare analysis shows that the consumers are always worse off with advertising. This is true even if the resulting equilibrium is characterized by a higher level of consumption and hours worked. In this case, welfare loses are driven by the "overworking" effect induced by advertising.

Advertising, Labor Supply and the Aggregate Economy: A Long Run Analysis