Consumption Externalities and Capital Accumulation in an Overlapping Generations Economy
AbstractThis paper extends the standard overlapping generations model of capital accumulation by introducing consumption externalities. It is assumed that each generation's felicity depends on the social level of benchmark consumption as well as on its own consumption. Since the benchmark consumption is represented by the average consumption of all agents, the contemporaneous consumption externalities are determined by both intragenerational and intergenerational interactions among the consumers. Given this setting, we show that even in a simple model with a logarithmic utility function, the presence of consumption externalities may significantly affect the dynamic behavior and steady-state characterization of the economy. We also reveal that the same conclusion holds in an endogenous growth model in which production externalities sustain continuing growth.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 17016.
Date of creation: Mar 2006
Date of revision:
overlapping generations; benchmark consumption; intergenerational externalities; intragenerational externalities;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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