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Will the Consumption Externalities' Effects in the Ramsey Model Please Stand Up?

  • Wendner, Ronald

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.

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File URL: http://mpra.ub.uni-muenchen.de/22905/1/MPRA_paper_22905.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22905.

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Date of creation: 25 May 2010
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Handle: RePEc:pra:mprapa:22905
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  1. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
  2. Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen Turnovsky, 2004. "Habit Formation, Catching Up with the Joneses, and Economic Growth," Working Papers UWEC-2004-09-P, University of Washington, Department of Economics, revised Jan 2004.
  3. Liu, Wen-Fang & Turnovsky, Stephen J., 2005. "Consumption externalities, production externalities, and long-run macroeconomic efficiency," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1097-1129, June.
  4. Michael Rauscher, 1997. "Conspicuous consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 66(1), pages 35-42, February.
  5. Turnovsky, Stephen J. & Monteiro, Goncalo, 2007. "Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences," European Economic Review, Elsevier, vol. 51(2), pages 479-504, February.
  6. 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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