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The welfare cost of external habits: a quantitative assessment

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  • Manuel A. Gómez

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Abstract

This paper quantifies the welfare cost of consumption externalities in an endogenous growth model with habit formation. Agent’s utility depends on both current consumption and a reference consumption level determined by economy-wide average past consumption. Although utility may be lower in the presence of consumption externalities, the welfare loss relative to the efficient growth path is found to be very small. This result is extremely robust to variations in the parameter values. However, there are relatively important differences in the timing of the welfare loss and in generational welfare.

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Bibliographic Info

Article provided by University of Chile, Department of Economics in its journal Estudios de Economia.

Volume (Year): 37 (2010)
Issue (Month): 1 Year 2010 (June)
Pages: 5-26

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Handle: RePEc:udc:esteco:v:37:y:2010:i:1:p:5-36

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Web page: http://www.econ.uchile.cl/
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Keywords: Welfare; Habit formation; Endogenous growth;

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