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Comparison Utility in a Growth Model

Author

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  • Christopher D Carroll
  • Jody Overland
  • David N Weil

Abstract

This paper compares the dynamics of two general equilibrium models of endogenous growth in which agents have comparison utility In the inward-looking economy individuals care about how their consumption in the current period compares to their own consumption in the past (one way to describe this is habit-formation in consumption) In the outward-looking economy individuals care about how their own level of consumption compares with others' consumption While steady state growth rates are identical in the two economies transition paths differ For example consider the effect of negative shock to capital In an endogenous growth model with standard preferences there will be no effect on the saving rate or the growth rate of output In both of the models that we consider however saving and growth will temporarily fall in response to the shock The initial decline in saving and growth will be larger in the inward-looking case However since agents in the outward-looking case do not take into account the externality effect of their consumption higher growth in this case will lead to lower utility than in the inward-looking case

Suggested Citation

  • Christopher D Carroll & Jody Overland & David N Weil, 1997. "Comparison Utility in a Growth Model," Economics Working Paper Archive 387, The Johns Hopkins University,Department of Economics.
    • Handle: RePEc:jhu:papers:387
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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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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