Anticipated Future Consumption in an Endogenous Growth Model

Abstract

We devise an endogenous growth model in which agents’ utility depends not only on current consumption but also on the pleasure of anticipated future consumption. We consider the case in which agents derive satisfaction from their own anticipatory feelings—inward-looking or internal anticipation—and the case in which agents derive utility from anticipation of other people’s future consumption—outward-looking or external anticipation. We characterize the effects of introducing a forward-looking consumption reference on the dynamics of the economy. Whereas the inward-looking economy features transitional dynamics, the outward-looking economy does not. The distortions caused by the externality in the economy with external habits can be corrected by subsidizing income at a time-varying rate or by means of a tax on consumption at a decreasing rate. We contrast the equilibrium dynamics of our specification to the more standard specification of the habit formation consumption reference point. Numerical simulations supplement the theoretical analysis.

Anticipation in leisure—Effects on labor‐leisure choice

“…To preserve the comparability with the previous specification and other papers in the literature such as Faria and McAdam (2013), Monteiro and Turnovsky (2016), and Gómez and Monteiro (2020) we specify the anticipated consumption reference benchmark as $$$A(t)={\rho }_{A}{\int }_{t}^{\infty }C[\tau ]{e}^{-{\rho }_{A}(\tau -t)}d\tau $$$ with the time derivative equaling $$$\dot{A}(t)={\rho }_{A}(A(t)-C(t)).$$$ Similarly, for leisure specification $$$Z(t)={\rho }_{Z}{\int }_{t}^{\infty }l[\tau ]{e}^{-{\rho }_{Z}(\tau -t)}d\tau $$$ with the time derivative giving us $$$\dot{Z}(t)={\rho }_{Z}(Z(t)-l(t)).$$$…”

“…To preserve the comparability with the previous specification and other papers in the literature such as Faria and McAdam (2013), Monteiro and Turnovsky (2016), and Gómez and Monteiro (2020) we specify the anticipated consumption reference benchmark as…”

“…As discussed in Monteiro and Turnovsky (2016) and Gómez and Monteiro (2020), despite the symmetry in the specification of both approaches, done mostly for comparison purposes, there are big differences between the two. The first thing to notice is that, in the backward‐looking case the reference level is based on past behaviors that have been completely realized and observed.…”

“…By eliminating uncertainty, the concept of pleasant anticipation eliminates the issue of time inconsistency. On the other hand, Monteiro and Turnovsky (2016) and Gómez and Monteiro (2020) deal with the issue of time inconsistency by assuming that the weights given to anticipated future consumption are known and decline exponentially into the future, while assuming that agents are committed to their initial decisions. Thus, one way or another the time inconsistency is not an issue.…”

“…Faria and McAdam (2018) look at the effects of habit formation and anticipation in the context of the Green Golden Rule and show that agents are more environmentally friendly in the presence of habit formation than in the case of anticipation. More recently, Gómez and Monteiro (2020) contrast the effects of anticipation versus habit formation for economic growth in the context of an endogenous growth model and conclude that the way the reference benchmark is defined has serious implications for the dynamic adjustment. Furthermore, they show the distortions caused by the externality in the economy with external anticipation can be corrected by subsidizing income at a time‐varying rate or by means of a tax on consumption at a decreasing rate.…”