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Consumption Externalities, Heterogeneous Agents and Cycles

Author

Listed:
  • Riham Barbar

    () (EPEE, University of Evry Val d'Essonne)

  • Jean-Paul Barinci

    () (EPEE, University of Evry Val d'Essonne)

Abstract

This paper studies the e¤ect of consumption externalities in a Ramsey model with heterogeneous agents and borrowing constraints. We consider two types of agents who di¤er in their initial wealth and discount factors. Further, we leave open the possibility of increase in consumption of one agent producing a positive (Keeping-Up with the Joneses) or a negative (Running-Away from the Joneses) effet over the marginal utility from own consumption of the other agent. We show that, at a steady-state equi- librium, inequality arises across agents which in turn implies that, agents have different consumption levels. Moreover, we show that, whenever the preferences display Keeping-Up with the Joneses feature, low elasticity of production factors substitution is no longer needed for the emergence of flip cycles and instability. Instead, only the external effects in consump- tion that plays a crucial role and promotes instability and the appearence of these endogeneous cycles.

Suggested Citation

  • Riham Barbar & Jean-Paul Barinci, 2009. "Consumption Externalities, Heterogeneous Agents and Cycles," Documents de recherche 09-02, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  • Handle: RePEc:eve:wpaper:09-02
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    File URL: http://epee.univ-evry.fr/RePEc/2009/09-02.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption externalities; borrowing constraints; hetero- geneous agents; saddle-path stability; endogeneous cycles;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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