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Conspicuous Consumption and Overlapping Generations

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  • Wendner, Ronald

Abstract

This paper investigates household decisions, and optimal taxation in an overlapping generations model in which individual utility depends on a weighted average of consumption of ones peers --- a ``keeping up with the Joneses'' consumption externality. In contrast to representative agent economies, the consumption externality \emph{generally} affects steady state savings and growth rates. The nature of the externality's impact, however, critically depends on the rate at which labor productivity declines with age. For a (strongly enough) declining labor productivity (or when people gradually retire), the consumption externality \emph{lowers} the steady state propensity to consume out of total wealth. The opposite holds for a constant labor productivity. The market economy can be decentralized by a (reverse) unfunded social security system if the rate of labor productivity decline is high (low). In contrast to previous results, the \emph{optimal} steady state capital income tax is zero, in spite of the consumption externality.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15527.

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Date of creation: 02 Jun 2009
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Handle: RePEc:pra:mprapa:15527

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Keywords: Consumption externality; labor productivity; gradual retirement; overlapping generations; keeping up with the Joneses; optimal taxation; capital taxation;

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Cited by:
  1. Wendner, Ronald, 2010. "Growth And Keeping Up With The Joneses," Macroeconomic Dynamics, Cambridge University Press, vol. 14(S2), pages 176-199, November.

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