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Multiple Equilibria in a Growth Model with Habit Persistence



This paper uses an otherwise standard, competitive growth model without externality and distortions to establish multiple balanced growth paths. Our model is based on the standard one-sector, endogenous growth model of Romer (1986), with a twist that households’ preference depends partly upon how his/her consumption compares to a habit stock formed by his/her own past consumption. This model establishes multiple equilibria because habit persistence in preference induces an intertemporal complementarity effect among consumption flows, with current consumption reinforcing future consumption. As a result, there exist two balanced-growth paths, with one path exhibiting low consumption and habits and high economic growth, and the other exhibiting high consumption and habits and low growth, and thus a development trap. Both steady states are saddle points, but an initial condition cannot pin down the steady state to which an economy converges. Both steady states cannot be pareto-ranked because of no market failure.

Suggested Citation

  • Been-Lon Chen, 2004. "Multiple Equilibria in a Growth Model with Habit Persistence," IEAS Working Paper : academic research 04-A015, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  • Handle: RePEc:sin:wpaper:04-a015

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    References listed on IDEAS

    1. Griliches, Zvi, 1979. "Sibling Models and Data in Economics: Beginnings of a Survey," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 37-64, October.
    2. William L. Parish & Robert J. Willis, 1993. "Daughters, Education, and Family Budgets Taiwan Experiences," Journal of Human Resources, University of Wisconsin Press, vol. 28(4), pages 863-898.
    3. Kessler, Daniel, 1991. "Birth Order, Family Size, and Achievement: Family Structure and Wage Determination," Journal of Labor Economics, University of Chicago Press, vol. 9(4), pages 413-426, October.
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    More about this item


    habit persistence; multiple equilibria;

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models


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