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Consumption Externalities, Heterogeneous Agents and Cycles

  • Riham Barbar


    (EPEE, University of Evry Val d'Essonne)

  • Jean-Paul Barinci


    (EPEE, University of Evry Val d'Essonne)

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    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.

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    Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 09-02.

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    Length: 16 pages
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:eve:wpaper:09-02
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    1. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
    2. Jean-Michel Grandmont & P, A, Pintus & R, De Vilder, 1997. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Working Papers 97-28, Centre de Recherche en Economie et Statistique.
    3. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 35-47, June.
    4. Jaime Alonso-Carrera & Jordi Caballe & Xavier Raurich, 2005. "Can consumption spillovers be a source of equilibrium indeterminacy?," Working Papers 154, Barcelona Graduate School of Economics.
    5. Becker, Robert A. & Foias, Ciprian, 1987. "A characterization of Ramsey equilibrium," Journal of Economic Theory, Elsevier, vol. 41(1), pages 173-184, February.
    6. Clark, Andrew E. & Oswald, Andrew J., 1996. "Satisfaction and comparison income," Journal of Public Economics, Elsevier, vol. 61(3), pages 359-381, September.
    7. Becker, R.C. & Foias, C., 1992. "The Local Bifurcation of Ramsey Equilibrium," Papers 92-002, Indiana - Center for Econometric Model Research.
    8. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
    9. Veblen, Thorstein, 1899. "The Theory of the Leisure Class," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number veblen1899.
    10. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
    11. Cecilia García-Peñalosa & Stephen Turnovsky, 2008. "Consumption externalities: a representative consumer model when agents are heterogeneous," Economic Theory, Springer, vol. 37(3), pages 439-467, December.
    12. Cole, Harold L & Mailath, George J & Postlewaite, Andrew, 1992. "Social Norms, Savings Behavior, and Growth," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1092-1125, December.
    13. Oswald, Andrew, 1997. "Happiness and Economic Performance," The Warwick Economics Research Paper Series (TWERPS) 478, University of Warwick, Department of Economics.
    14. Chen, Been-Lon & Hsu, Mei, 2007. "Admiration is a source of indeterminacy," Economics Letters, Elsevier, vol. 95(1), pages 96-103, April.
    15. 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.
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