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Welfare Implications of the Interaction between Habits and Consumption Externalities

Author

Listed:
  • Jaime Alonso-Carrera
  • Xavier Raurich
  • Jordi Caballé

Abstract

We analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium. In particular, we show that the competitive equilibrium is inefficient when consumption externalities and habit adjusted consumption are not perfect substitutes.

Suggested Citation

  • Jaime Alonso-Carrera & Xavier Raurich & Jordi Caballé, 2015. "Welfare Implications of the Interaction between Habits and Consumption Externalities," Working Papers 125, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:125
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    References listed on IDEAS

    as
    1. Harbaugh, Richmond, 1996. "Falling behind the Joneses: relative consumption and the growth-savings paradox," Economics Letters, Elsevier, vol. 53(3), pages 297-304, December.
    2. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
    3. Jaime Alonso-Carrera & Jordi Caball?Author-Email: jordi.caballe@uab.es & Xavier Raurich, 2001. "Income Taxation with Habit Formation and Consumption Externalities," UFAE and IAE Working Papers 496.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. de la Croix, David, 1998. "Growth and the relativity of satisfaction," Mathematical Social Sciences, Elsevier, vol. 36(2), pages 105-125, September.
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    Keywords

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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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