Growth, habit formation, and catching-up with the Joneses (original) (raw)

Income Taxation with Habit Formation and Consumption Externalities

2001

We analyze the dynamic behavior and the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. We discuss the effects of ßat rate income taxes and characterize the optimal income taxation policy. We show that, when consumption externalities and habit adjusted consumption are not perfect substitutes, a counter-cyclical income tax rate allows the competitive equilibrium to replicate the efficient path. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium.

Welfare Implications of the Interaction Between Habits and Consumption Externalities*

International Economic Review, 2006

We analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium. In particular, we show that the competitive equilibrium is inefficient when consumption externalities and habit adjusted consumption are not perfect substitutes.

WELFARE IMPLICATIONS OF THE INTERACTION BETWEEN HABITS AND CONSUMPTION EXTERNALITIES &ast

International Economic Review, 2006

Consumption Externalities, Habit Formation and Equilibrium Efficiency &ast

Scandinavian Journal of Economics, 2004

We analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subject to both habit formation and consumption spillovers. Using an additive specification for preferences, according to which the argument in the utility function is a linear combination of present and past values of own consumption and consumption spillovers, we analyze the circumstances under which these spillovers are a source of inefficiency. It is shown that consumption externalities have to interact with habits in order to generate an inefficient dynamic equilibrium. Finally, we characterize optimal tax policies aimed at restoring efficient decentralized paths.

Consumption Externalities, Habit Formation, and Equilibrium Efficiency

2003

We analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subject to both habit formation and consumption spillovers. Using an additive speciÞcation for preferences, according to which the argument in the utility function is a linear combination of present and past own consumption and consumption spillovers, we analyze under which circumstances these spillovers are a source of inefficiency. We show that consumption externalities have to interact with habits in order to generate an inefficient dynamic equilibrium. Finally, we characterize optimal tax policies aimed at restoring efficient decentralized paths. JEL classiÞcation codes: D91, E62, O40.

Habit Formation, Catching Up with the Joneses, and Economic Growth

Journal of Economic Growth, 2004

Our objective is to investigate how alternative assumptions about preferences affect the process of economic growth. To do this, we analyze a neoclassical growth model under three alternative preference speci®cations: (i) time separable, (ii) catching up with the Joneses, and (iii) habit formation. Departing from the time separable speci®cation leads to important differences in the dynamic structure, the adjustment path followed by key economic variables, the correlation patterns implied by the time series generated by the model, and the speed of convergence to the new steady state. In the catching up with the Joneses economy the differences arise from a consumption externality, while in the habit formation economy the difference arises from the fact that agents not only smooth consumption but also its rate of change.

Equilibrium Dynamics in the Neoclassical Growth Model with Habit Formation and Elastic Labor Supply

Theoretical Economics Letters

This note analyzes the equilibrium dynamics in the neoclassical growth model with habit-forming preferences and elastic labor supply. Habits enter into utility in a multiplicative way. The specification of the habit formation process comprises the particular cases of internal and external habits. Existence, uniqueness and saddle-path stability of the steady state are proved analytically.

Internal habits in an endogenous growth model with elastic labor supply

Economic Modelling, 2015

This paper studies the implications of introducing internal versus external habits in an endogenous growth model with elastic labor supply. We first show that the comparative-static effects of a shock in habits parameters are qualitatively different depending on how habits are specified. An increase in the weight of habits in utility raises long-run growth and labor supply in the external-habits model, whereas it reduces labor supply and has an ambiguous effect on long-run growth in the internal-habits model. Increasing the speed of adjustment of habits to current consumption has no effect on long-run values with external habits, but has a negative effect on long-run growth and labor supply with internal habits. Numerical simulations reveal that the qualitative differences are also quantitatively important. Finally, we illustrate the dynamic effects of an increase in productivity. On impact and in the long-run this shock has a positive effect on growth, labor supply and the savings rate in both models. However, along the transition labor supply exhibits a procyclical response to the productivity increase in the internal-habits model, but a countercyclical response in the external-habits model. These results could be helpful on the still open debate on whether habits are internally or externally formed.

Endogenous Growth, Habit Formation and Convergence Speed

The B.E. Journal of Macroeconomics, 2010

This paper analyzes the effect on the economy dynamics of alternative formulations of habit persistence in an endogenous growth model. The focus is on the impact on the convergence speed, which is the key determinant of the local dynamics. In contrast with previous numerical results, we show that the external-habits economy may converge at a higher, lower or equal rate than the internal-habits economy depending on the specification of the utility function. We also prove that the higher the strength of habits and the lower the speed of adjustment of habits to current consumption, the lower the convergence speed.

Growth, habit formation, and catching-up with the Joneses (original) (raw)

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