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Will the Consumption Externalities' Effects in the Ramsey Model Please Stand Up?

Ron Wendner ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates household decisions when individual utility depends on a consumption reference level. The desire to ``keep up with the Joneses'' represents one such example. The prior literature shows that, in a Ramsey model, consumption externalities have no impact on steady state behavior, once labor supply is exogenous. In contrast, this paper argues that --- once there is (exogenous) technological change --- consumption externalities always affect steady state behavior, even if labor supply is exogenous. The nature of the effects depends on the consumption externality's impact on a household's elasticity of marginal utility of consumption.

Keywords: Consumption externality; keeping up with the Joneses; Ramsey model; intertemporal elasticity of substitution (search for similar items in EconPapers)
JEL-codes: O41 D91 E21 (search for similar items in EconPapers)
Date: 2010-05-25
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Journal Article: Will the consumption externalities' effects in the Ramsey model please stand up? (2011) Downloads
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