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Consumption Externalities, Habit Formation and Equilibrium Efficiency *
Author(s) -
AlonsoCarrera Jaime,
Caballé Jordi,
Raurich Xavier
Publication year - 2004
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.0347-0520.2004.00357.x
Subject(s) - economics , inefficiency , consumption (sociology) , externality , microeconomics , competitive equilibrium , argument (complex analysis) , welfare , order (exchange) , function (biology) , general equilibrium theory , capital (architecture) , market economy , history , social science , biochemistry , chemistry , archaeology , finance , evolutionary biology , sociology , biology
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.