We analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subject to both habit formation and consumption spillovers. Using an additive specification for preferences, according to which the argument in the utility function is a linear combination of present and past values of own consumption and consumption spillovers, we analyze the circumstances under which these spillovers are a source of inefficiency. It is shown that consumption externalities have to interact with habits in order to generate an inefficient dynamic equilibrium. Finally, we characterize optimal tax policies aimed at restoring efficient decentralized paths. © The editors of the Scandinavian Journal of Economics 2004.
|Journal||Scandinavian Journal of Economics|
|Publication status||Published - 1 Jan 2004|
- Consumption externalities
- Equilibrium efficiency
- Habit formation