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Consumption externalities: a representative consumer model when agents are heterogeneous

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Abstract

We examine a growth model with consumption externalities where agents differ in their initial capital endowment and their reference group. We show under which conditions the aggregate equilibrium with heterogeneous agents replicates that obtained with a representative consumer, despite the fact that different individuals have different consumption levels. Next we consider the implications of the presence of consumption externalities for the long-run distributions of income and wealth. We find that, in a growing economy, “keeping up with the Joneses” results in less inequality than would prevail in an economy with no consumption externalities.

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Authors and Affiliations

  1. CNRS and GREQAM, 2 rue de la Charité, 13002, Marseille, France

    Cecilia García-Peñalosa

  2. University of Washington, Seattle UW Economics, Box 353330, Savery 302, Seattle, WA, 98195, USA

    Stephen J. Turnovsky

Authors
  1. Cecilia García-Peñalosa
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  2. Stephen J. Turnovsky
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Correspondence to Cecilia García-Peñalosa.

Additional information

García-Peñalosa’s research was supported in part by the Institut d’Economie Publique (IDEP) at GREQAM. Turnovsky’s research was supported in part by the Castor endowment at the University of Washington. Much of the research for this paper was undertaken while Turnovsky was visiting GREQAM. The paper has benefited from a seminar presentation at Bilkent University, Ankara.

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García-Peñalosa, C., Turnovsky, S.J. Consumption externalities: a representative consumer model when agents are heterogeneous. Econ Theory 37, 439–467 (2008). https://doi.org/10.1007/s00199-007-0296-6

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  • DOI: https://doi.org/10.1007/s00199-007-0296-6

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