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Author: | Alonso-Carrera, J. Caballe, J. Raurich, X. |
Title: | Growth, habit formation, and catching-up with the Joneses |
Journal: | European Economic Review
2005 : AUG, VOL. 49:6, p. 1665-1691 |
Index terms: | consumption consumer behaviour externalities taxation policy growth models |
Language: | eng |
Abstract: | When habits are introduced multiplicatively in a capital accumulation model, the consumers' objective function might fail to be concave. This paper provides conditions aimed at guaranteeing the existence of interiour solutions to the consumers' problem. In addition, the equilibrium path of two growth models with multiplicative habits is characterized: the internal habit formation model and the external habit formation (or catching-up with the Joneses) model. It is shown that the introduction of external habits makes the equilibrium path inefficient. In this context, the optimal tax policy is characterized. |
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