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Notes on Habit Formation and Socially Optimal Growth

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Abstract

The interaction between habit formation and pollution-type ex- ternalities modifies the social optimum through discount effects and elasticity effects. If the substitution elasticity does not exceed unity, both effects reduce optimal consumption and capital in the long run, and the optimal capital-income tax increases with the relative impor- tance of habits. Similar results hold with high elasticity if the relative importance of habits is sufficiently high.

Suggested Citation

  • Simone Valente, 2006. "Notes on Habit Formation and Socially Optimal Growth," CER-ETH Economics working paper series 06/48, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    • Handle: RePEc:eth:wpswif:06-48
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    File URL: http://www.cer.ethz.ch/research/wp_06_48.pdf
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    References listed on IDEAS

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    1. Tetsuo Ono, 2002. "Is habitual consumption harmful to the environment?," Economics Bulletin, AccessEcon, vol. 17(1), pages 1-10.
    2. Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen J. Turnovsky, 2004. "Habit Formation, Catching Up with the Joneses, and Economic Growth," Journal of Economic Growth, Springer, vol. 9(1), pages 47-80, March.
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    6. Wendner, Ronald, 2003. "Do habits raise consumption growth?," Research in Economics, Elsevier, vol. 57(2), pages 151-163, June.
    7. repec:ebl:ecbull:v:4:y:2002:i:7:p:1-10 is not listed on IDEAS
    8. repec:ebl:ecbull:v:17:y:2002:i:1:p:1-10 is not listed on IDEAS
    9. Ronald Wendner, 2002. "Capital Accumulation and Habit Formation," Economics Bulletin, AccessEcon, vol. 4(7), pages 1-10.
    10. Harl E. Ryder & Geoffrey M. Heal, 1973. "Optimal Growth with Intertemporally Dependent Preferences," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(1), pages 1-31.
    11. Carroll, Christopher D., 2000. "Solving consumption models with multiplicative habits," Economics Letters, Elsevier, vol. 68(1), pages 67-77, July.
    12. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
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    Cited by:

    1. Masako Ikefuji, 2008. "Habit formation in an endogenous growth model with pollution abatement activities," Journal of Economics, Springer, vol. 94(3), pages 241-259, September.
    2. Fatma SAFI & Lobna Ben Hassen, 2021. "Subtractive versus Multiplicative Habits in Environmental Economics," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 1, pages 72-90, March.

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    More about this item

    Keywords

    externalities; habit formation; pollution; optimal growth.;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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