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Will the Consumption Externalities' Effects in the Ramsey Model Please Stand Up?

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  • Wendner, Ronald

Abstract

This paper investigates household decisions when individual utility depends on a consumption reference level. The desire to ``keep up with the Joneses'' represents one such example. The prior literature shows that, in a Ramsey model, consumption externalities have no impact on steady state behavior, once labor supply is exogenous. In contrast, this paper argues that --- once there is (exogenous) technological change --- consumption externalities always affect steady state behavior, even if labor supply is exogenous. The nature of the effects depends on the consumption externality's impact on a household's elasticity of marginal utility of consumption.

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File URL: http://mpra.ub.uni-muenchen.de/22905/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22905.

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Date of creation: 25 May 2010
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Handle: RePEc:pra:mprapa:22905

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Keywords: Consumption externality; keeping up with the Joneses; Ramsey model; intertemporal elasticity of substitution;

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  1. Stephen J Turnovsky & Goncalo Monteiro, . "Consumption Externalities, Production Externalities and Efficient Capital Accumulation under Time Non-separable Preferences," Discussion Papers 05/08, Department of Economics, University of York.
  2. Michael Rauscher, 1997. "Conspicuous consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 66(1), pages 35-42, February.
  3. Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen J. Turnovsky, 2004. "Habit Formation, Catching Up with the Joneses, and Economic Growth," Journal of Economic Growth, Springer, vol. 9(1), pages 47-80, 03.
  4. Liu, Wen-Fang & Turnovsky, Stephen J., 2005. "Consumption externalities, production externalities, and long-run macroeconomic efficiency," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1097-1129, June.
  5. Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 72(3), pages 241-262, October.
  6. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
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Cited by:
  1. Goncalo Monteiro & Stephen Turnovsky, 2013. "Anticipated Consumption and its Impact on Capital Accumulation and Growth: 'Forward-Looking' vs. 'Backward-Looking' Consumption Reference," CESifo Working Paper Series 4536, CESifo Group Munich.
  2. Aronsson, Thomas & Johansson-Stenman, Olof, 2010. "Veblen’s Theory of the Leisure Class Revisited: Implications for Optimal Income Taxation," Working Papers in Economics 466, University of Gothenburg, Department of Economics.
  3. Aronsson, Thomas & Johansson-Stenman, Olof, 2013. "Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences," Working Papers in Economics 558, University of Gothenburg, Department of Economics.
  4. Johansson-Stenman, Olof & Sterner, Thomas, 2011. "Discounting and Relative Consumption," Discussion Papers dp-11-38, Resources For the Future.
  5. Aronsson, Thomas & Johansson-Stenman, Olof, 2012. "When Samuelson Met Veblen Abroad: National and Global Public Good Provision when Social Comparisons Matter," UmeÃ¥ Economic Studies 843, Umeå University, Department of Economics.
  6. Thomas Aronsson & Olof Johansson-Stenman, 2013. "Veblen’s theory of the leisure class revisited: implications for optimal income taxation," Social Choice and Welfare, Springer, vol. 41(3), pages 551-578, September.

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