Economic Growth and the Relativity of Satisfaction
We extent Ramsey’s model to be in accordance with the facts that self-reported satisfaction levels are almost unrelated to economic prosperity, both across countries and across time. We assume that things are judged by the extent to which they depart from collective norms. Norms are based on the past experience of all agents. A special case is when norms are build on the basis of the best previous experience. Agents do not internalize their own effect on collective norms and the competitive equilibrium is thus sub-optimal. An optimal solution could however be decentralized by a planner. The dynamics displays oscillations, slow adjustment speed or path dependency and substantial transitory effects of fiscal policy.
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