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The welfare cost of external habits: a quantitative assessment

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  • Manuel A. Gómez

    ()

Abstract

This paper quantifies the welfare cost of consumption externalities in an endogenous growth model with habit formation. Agent’s utility depends on both current consumption and a reference consumption level determined by economy-wide average past consumption. Although utility may be lower in the presence of consumption externalities, the welfare loss relative to the efficient growth path is found to be very small. This result is extremely robust to variations in the parameter values. However, there are relatively important differences in the timing of the welfare loss and in generational welfare.

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File URL: http://www.econ.uchile.cl/uploads/publicacion/397b0cdc5d9ac6a4bd0509047197f0064bd16e21.pdf
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Article provided by University of Chile, Department of Economics in its journal Estudios de Economia.

Volume (Year): 37 (2010)
Issue (Month): 1 Year 2010 (June)
Pages: 5-26

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Handle: RePEc:udc:esteco:v:37:y:2010:i:1:p:5-36
Contact details of provider: Web page: http://www.econ.uchile.cl/

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Keywords: Welfare; Habit formation; Endogenous growth;

Find related papers by JEL classification:

  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • D62 - Microeconomics - - Welfare Economics - - - Externalities
  • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

References listed on IDEAS
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  1. Jhy-yuan Shieh & Ching-chong Lai & Wen-ya Chang, 2000. "Addictive behavior and endogenous growth," Journal of Economics, Springer, vol. 72(3), pages 263-273, October.
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  12. 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.
  13. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
  14. Ferraguto Giuseppe & Pagano Patrizio, 2003. "Endogenous Growth with Intertemporally Dependent Preferences," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-40, November.
  15. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
  16. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
  17. Mansoorian, Arman & Michelis, Leo, 2005. "Money, habits and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1267-1285, July.
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