Habit Formation, Catching Up with the Joneses, and Economic Growth (original) (raw)
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Growth, habit formation, and catching-up with the Joneses
European Economic Review, 2005
When habits are introduced multiplicatively in a capital accumulation model, the consumers' objective function might fail to be concave. In this paper we provide conditions aimed at guaranteeing the existence of interior solutions to the consumers' problem. We also characterize the equilibrium path of two growth models with multiplicative habits: the internal habit formation model, where individual habits coincide with own past consumption, and the external habit formation (or catchingup with the Joneses) model, where habits arise from the average past consumption in the economy. We show that the introduction of external habits makes the equilibrium path inefficient during the transition towards the balanced growth path. We characterize in this context the optimal tax policy.
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.
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.
This paper analyzes popular time-nonseparable utility functions that describe "habit formation" consumer preferences comparing current consumption with the time averaged past consumption of the same individual and "catching up with the Joneses" (CuJ) models comparing individual consumption with a cross-sectional average consumption level. Few of these models give reasonable optimum consumption time series. We introduce theoretically justified utility specifications leading to a plausible consumption behavior to show that habit formation preferences must be described by a power CRRA utility function different from the exponential CARA used for CuJ.
Public Spending in a Model of Endogenous Growth with Habit Formation
Discrete Dynamics in Nature and Society, 2010
This paper introduces habit-forming preferences in a Barro-type endogenous growth model with productive public services. Government expenditure, which may be subject to congestion, is financed by distortionary income taxation. Different from the standard time-separable model, the presence of habits makes the economy feature transitional dynamics, which are solved in closed form. Setting the income tax so as to equate the elasticity of public services in production is shown to maximize both long-run growth and welfare as in the standard model. This second-best solution coincides with the first-best outcome only in the presence of proportional congestion.
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
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.
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.
The transition to a new inflation rate in models with habit formation
Economics Letters, 2006
The money in utility model is reconsidered to allow for habit forming preferences, in which habits develop over instantaneous utility from consumption and real money holdings. An increase in the inflation rate does not affect the steady state level of capital or consumption, but reduces the steady state levels of real money holdings and habits. The model has important off steady state dynamics.
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.