Endogenous Growth, Habit Formation and Convergence Speed (original) (raw)

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.

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.

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.

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.

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.

A Closed-form Solution of a Two-sector Endogenous Growth Model with Habit Formation

Australian Economic Papers, 2016

This paper determines a closed-form solution of the two-sector endogenous growth model with habit formation. Differently to the paper of Hiraguchi, but similar to other approaches as those of Gomez, Turnovsky and Monteiro, we consider that the habits are formed in an external manner and enter additively into the utility function.

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.

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.