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Consumption Externalities, Habit Formation and Equilibrium Efficiency*

Jaime Alonso‐Carrera, Jordi Caballe () and Xavier Raurich ()
Authors registered in the RePEc Author Service: Jaime Alonso-Carrera ()

Scandinavian Journal of Economics, 2004, vol. 106, issue 2, 231-251

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.

Date: 2004
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https://doi.org/10.1111/j.0347-0520.2004.00357.x

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Scandinavian Journal of Economics is currently edited by Richard Friberg, Matti Liski and Kjetil Storesletten

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