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Comparison Utility in a Growth Model

  • Christopher D Carroll
  • Jody Overland
  • David N Weil

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

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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 387.

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Date of creation: Jun 1997
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Handle: RePEc:jhu:papers:387
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  1. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Gali, Jordi, 1994. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 1-8, February.
  3. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
  4. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
  5. Kapteyn, Arie & Wansbeek, Tom & Buyze, Jeannine, 1978. "The dynamics of preference formation," Economics Letters, Elsevier, vol. 1(1), pages 93-98.
  6. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  7. Carroll, Christopher D. & Weil, David N., 1994. "Saving and growth: a reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 133-192, June.
  8. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  10. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  11. Sen, Amartya, 1983. "Poor, Relatively Speaking," Oxford Economic Papers, Oxford University Press, vol. 35(2), pages 153-69, July.
  12. Karen E. Dynan, 1993. "Habit formation in consumer preferences: evidence from panel data," Working Paper Series / Economic Activity Section 143, Board of Governors of the Federal Reserve System (U.S.).
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