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Comparison Utility in a Growth Model

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  • Christopher D. Carroll
  • Jody Overland
  • David N. Weil

Abstract

This paper compares the dynamics of two general equilibrium models of endogenous growth in which agents have comparison utility.' In the inward-looking' economy, individuals care about how their consumption in the current period compares to their own consumption in the past (one way to describe this is habit-formation' in consumption). In the outward-looking' economy, individuals care about how their own level of consumption compares with others' consumption. Consider the effect of negative shock to capital. In an endogenous growth model with standard preferences, there will be no effect on the saving rate or the growth rate of output. In both of the models that we consider, however, saving and growth will temporarily fall in response to the shock. The initial decline in saving and growth will be larger in the inward-looking case. However, since agents in the outward-looking case do not take into account the externality effect of their consumption, higher growth in this case will lead to lower utility than in the inward-looking case.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6138.

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Date of creation: Aug 1997
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Publication status: published as Journal of Economic Growth, Vol. 2, no. 4 (December 1997): 339-367.
Handle: RePEc:nbr:nberwo:6138

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  1. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  2. Wansbeek, T.J. & Buyze, J. & Kapteyn, A.J., 1980. "The dynamics of preference formation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364307, Tilburg University.
  3. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
  4. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
  5. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
  6. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(2), pages 298-321, April.
  7. Sen, Amartya, 1983. "Poor, Relatively Speaking," Oxford Economic Papers, Oxford University Press, vol. 35(2), pages 153-69, July.
  8. Carroll, Christopher D. & Weil, David N., 1994. "Saving and growth: a reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 40(1), pages 133-192, June.
  9. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  10. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 500-521, June.
  11. Karen E. Dynan, 1993. "Habit formation in consumer preferences: evidence from panel data," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 143, Board of Governors of the Federal Reserve System (U.S.).
  12. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
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