Growth, habit formation, and catching-up with the Joneses

Jaime Alonso-Carrera, Jordi Caballé, Xavier Raurich

Research output: Contribution to journalArticleResearchpeer-review

72 Citations (Scopus)

Abstract

When habits are introduced multiplicatively in a capital accumulation model, the consumers' objective function might fail to be concave. In this paper, we provide conditions aimed at guaranteeing the existence of interior solutions to the consumers' problem. We also characterize the equilibrium path of two growth models with multiplicative habits: the internal habit formation model, where individual habits coincide with own past consumption, and the external habit formation (or catching-up with the Joneses) model, where habits arise from the average past consumption in the economy. We show that the introduction of external habits makes the equilibrium path inefficient. We characterize in this context the optimal tax policy. © 2004 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)1665-1691
JournalEuropean Economic Review
Volume49
DOIs
Publication statusPublished - 1 Aug 2005

Keywords

  • Consumption externalities
  • Endogenous growth
  • Habit formation
  • Optimal taxation

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