Consumption Externalities, Heterogeneous Agents and Cycles

Riham Barbar () and Jean-Paul Barinci ()
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Riham Barbar: EPEE, University of Evry Val d'Essonne
Jean-Paul Barinci: EPEE, University of Evry Val d'Essonne

No 09-02, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: This paper studies the e¤ect of consumption externalities in a Ramsey model with heterogeneous agents and borrowing constraints. We consider two types of agents who di¤er in their initial wealth and discount factors. Further, we leave open the possibility of increase in consumption of one agent producing a positive (Keeping-Up with the Joneses) or a negative (Running-Away from the Joneses) effet over the marginal utility from own consumption of the other agent. We show that, at a steady-state equi- librium, inequality arises across agents which in turn implies that, agents have different consumption levels. Moreover, we show that, whenever the preferences display Keeping-Up with the Joneses feature, low elasticity of production factors substitution is no longer needed for the emergence of flip cycles and instability. Instead, only the external effects in consump- tion that plays a crucial role and promotes instability and the appearence of these endogeneous cycles.

Keywords: Consumption externalities; borrowing constraints; hetero- geneous agents; saddle-path stability; endogeneous cycles (search for similar items in EconPapers)
JEL-codes: E22 E23 O40 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2009
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