Will the Consumption Externalities' Effects in the Ramsey Model Please Stand Up?
This paper investigates household decisions when individual utility depends on a consumption reference level. The desire to ``keep up with the Joneses'' represents one such example. The prior literature shows that, in a Ramsey model, consumption externalities have no impact on steady state behavior, once labor supply is exogenous. In contrast, this paper argues that --- once there is (exogenous) technological change --- consumption externalities always affect steady state behavior, even if labor supply is exogenous. The nature of the effects depends on the consumption externality's impact on a household's elasticity of marginal utility of consumption.
|Date of creation:||25 May 2010|
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- Turnovsky, Stephen J. & Monteiro, Goncalo, 2007.
"Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences,"
European Economic Review,
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- Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen Turnovsky, 2004.
"Habit Formation, Catching Up with the Joneses, and Economic Growth,"
UWEC-2004-09-P, University of Washington, Department of Economics, revised Jan 2004.
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- Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 72(3), pages 241-262, October.
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