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Welfare Implications of the Interaction between Habits and Consumption Externalities

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  • Jaime Alonso-Carrera
  • Jordi Caballé
  • Xavier Raurich

Abstract

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.

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File URL: http://research.barcelonagse.eu/tmp/working_papers/125.pdf
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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 125.

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Date of creation: Apr 2004
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Handle: RePEc:bge:wpaper:125

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Keywords: Habit formation; consumption externalities;

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References

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  1. Jaime Alonso-Carrera & Jordi Caball?Author-Email: jordi.caballe@uab.es & Xavier Raurich, 2001. "Income Taxation with Habit Formation and Consumption Externalities," UFAE and IAE Working Papers 496.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Harbaugh, Richmond, 1996. "Falling behind the Joneses: relative consumption and the growth-savings paradox," Economics Letters, Elsevier, vol. 53(3), pages 297-304, December.
  3. de la Croix, David, 1998. "Growth and the relativity of satisfaction," Mathematical Social Sciences, Elsevier, vol. 36(2), pages 105-125, September.
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Citations

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Cited by:
  1. Alonso-Carrera, Jaime & Caballé, Jordi & Raurich, Xavier, 2008. "Can consumption spillovers be a source of equilibrium indeterminacy?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2883-2902, September.
  2. Tobias Koenig & Andreas Wagener, 2010. "Tax Structure and Government Expenditures under Tax Equity Norms," CESifo Working Paper Series 3205, CESifo Group Munich.
  3. Koenig, Tobias & Wagener, Andreas, 2013. "Tax structure and government expenditures with tax equity concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 137-153.
  4. Gómez Manuel A., 2010. "Endogenous Growth, Habit Formation and Convergence Speed," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, January.
  5. Francisco Alvarez-Cuadrado, 2006. "Envy, Leisure, And Restrictions On Working Hours," Departmental Working Papers 2006-01, McGill University, Department of Economics.
  6. Manuel A. Gómez, 2010. "The welfare cost of external habits: a quantitative assessment," Estudios de Economia, University of Chile, Department of Economics, vol. 37(1 Year 20), pages 5-26, June.
  7. Manuel Gómez, 2010. "A note on external habits and efficiency in the AK model," Journal of Economics, Springer, vol. 99(1), pages 53-64, February.
  8. Ali Choudhary & Paul Levine, 2006. "The 24/7 Society and Multiple Habits," School of Economics Discussion Papers 0506, School of Economics, University of Surrey.
  9. Gomez Suarez, Manuel A., 2008. "Utility and production externalities, equilibrium efficiency and leisure specification," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1496-1519, December.
  10. Chen, Been-Lon & Hsu, Mei, 2009. "Consumption externality, efficiency and optimal taxation in one-sector growth model," Economic Modelling, Elsevier, vol. 26(6), pages 1328-1334, November.
  11. Nakamoto, Yasuhiro, 2009. "Jealousy and underconsumption in a one-sector model with wealth preference," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 2015-2029, December.
  12. Chen, Been-Lon & Lee, Shun-Fa, 2007. "Import Tariffs and Growth in a Model with Habits," MPRA Paper 27667, University Library of Munich, Germany.

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