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The welfare cost of external habits: a quantitative assessment

Author

Listed:
  • Manuel A. Gómez
Abstract
This paper quantifies the welfare cost of consumption externalities in an endogenous growth model with habit formation. Agent’s utility depends on both current consumption and a reference consumption level determined by economy-wide average past consumption. Although utility may be lower in the presence of consumption externalities, the welfare loss relative to the efficient growth path is found to be very small. This result is extremely robust to variations in the parameter values. However, there are relatively important differences in the timing of the welfare loss and in generational welfare.

Suggested Citation

  • Manuel A. Gómez, 2010. "The welfare cost of external habits: a quantitative assessment," Estudios de Economia, University of Chile, Department of Economics, vol. 37(1 Year 20), pages 5-26, June.
    • Handle: RePEc:udc:esteco:v:37:y:2010:i:1:p:5-36
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Welfare; Habit formation; Endogenous growth;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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