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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- Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen Turnovsky, 2004.
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UWEC-2004-09-P, University of Washington, Department of Economics, revised Jan 2004.
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UWEC-2006-26-P, University of Washington, Department of Economics.
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- Michael Rauscher, 1997. "Conspicuous consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 66(1), pages 35-42, February.
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