The welfare cost of external habits: a quantitat ive assessment

  • Manuel A. Gómez Facultad de Ciencias Económicas y Empresariales, Universidad de A Coruña. Campus de Elviña, 15071 A Coruña

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.
Keywords Welfare, Habit formation, Endogenous growth
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How to Cite
Gómez, M. (2016). The welfare cost of external habits: a quantitat ive assessment. Estudios de Economía, 37(1), pp. 5-26. Retrieved from https://estudiosdeeconomia.uchile.cl/index.php/EDE/article/view/40120/43346
Section
Articles
Published
2016-04-21