Conspicuous consumption and generation replacement in a model of perpetual youth

Ron Wendner

Journal of Public Economics, 2010, vol. 94, issue 11-12, 1093-1107

Abstract: This paper investigates household decisions in an overlapping generations model in which individual utility depends on a weighted average of consumption of one's peers. In contrast to representative agent economies, the consumption externality generally affects savings and growth rates. The effects critically depend on the rate at which labor productivity changes with age. For a high (low) rate, the externality lowers (raises) the steady state propensity to consume out of total wealth. The optimal allocation can be decentralized by a (reverse) unfunded social security system if the rate of labor productivity decline is high (low). In contrast to discrete time OLG models, the optimal steady state capital income tax is zero, in spite of the 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)
Date: 2010
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:94:y:2010:i:11-12:p:1093-1107

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