Consumption externalities, habit formation and equilibrium efficiency

Jaime Alonso-Carrera, Jordi Caballé, Xavier Raurich

Research output: Contribution to journalArticleResearchpeer-review

43 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)231-251
JournalScandinavian Journal of Economics
Volume106
Issue number2
DOIs
Publication statusPublished - 1 Jan 2004

Keywords

  • Consumption externalities
  • Equilibrium efficiency
  • Habit formation

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