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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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Related research

Keywords: Welfare; Habit formation; Endogenous growth;

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  1. Patrick Toche, 2009. "Multiple BGPs in a Growth Model with Habit Persistence: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 189-195, 02.
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  12. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2006. "Welfare Implications Of The Interaction Between Habits And Consumption Externalities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 557-571, 05.
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  15. Gruner, Hans Peter & Heer, Burkhard, 2000. "Optimal Flat-Rate Taxes on Capital--A Re-examination of Lucas' Supply Side Model," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 289-305, April.
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  17. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  18. Turnovsky, Stephen J. & Monteiro, Goncalo, 2007. "Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences," European Economic Review, Elsevier, vol. 51(2), pages 479-504, February.
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  22. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
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