Conspicuous Consumption and Overlapping Generations

Ron Wendner

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates household decisions, and optimal taxation in an overlapping generations model in which individual utility depends on a weighted average of consumption of ones peers --- a ``keeping up with the Joneses'' consumption externality. In contrast to representative agent economies, the consumption externality \emph{generally} affects steady state savings and growth rates. The nature of the externality's impact, however, critically depends on the rate at which labor productivity declines with age. For a (strongly enough) declining labor productivity (or when people gradually retire), the consumption externality \emph{lowers} the steady state propensity to consume out of total wealth. The opposite holds for a constant labor productivity. The market economy can be decentralized by a (reverse) unfunded social security system if the rate of labor productivity decline is high (low). In contrast to previous results, the \emph{optimal} steady state capital income tax is zero, in spite of the consumption externality.

Keywords: Consumption externality; labor productivity; gradual retirement; overlapping generations; keeping up with the Joneses; optimal taxation; capital taxation (search for similar items in EconPapers)
JEL-codes: D90 E21 O40 (search for similar items in EconPapers)
Date: 2009-06-02
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Conspicuous Consumption and Overlapping Generations? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:15527

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