Internal vs. External Habit Formation in a Growing Economy with Overlapping Generations

Abstract

This paper explores the roles of internal and external habit formation in a simple model of endogenous growth with overlapping generations. Unlike the representative agent settings in which the distinction between internal and external habits may not yield significant qualitative differences in working of the model economy, we show that the internal and external habit persistence in overlapping generations economies may have qualitatively different effects on the steady-state characterization as well as on the dynamic behavior of the economy. We also confirm that in an overlapping generations framework, whether the habits in the utility function takes subtractive or multiplicative forms may be critical both for long-run growth and for transitional dynamics.keywords: internal habits formation, external habit formation, overlapping generations economy, long-run growth JEL classification: E32, J24, O40 * We thank David de la Croix, Stephen Turnovsky and Bertrand Wigniolleor for their helpful comments on earlier versions of this paper. Our

Inherited Tastes and Endogenous Longevity

“…This appendix extends the model developed in the main text to two distinct cases: (1) old agents inherit consumption behavior of their parents when they are old; this assumption follows Ikefuji and Mino (2009), who study an OLG model with taste inheritance and endogenous growth, and (2) there exist both external and internal habits, as in Alonso-Carrera et al (2007). The expected lifetime utility function equation (6) modifies to become the following:…”

“…Appendix A provides the proofs of the propositions stated in the main text. Appendix B briefly extends the model developed in the main text to the following cases: (i) taste inheritance transmission implying a comparison of consumption not only to what individuals belonging to the previous generation consumed when they were still living with individuals belonging to the current generation, but also to what was consumed when they were old [Ikefuji and Mino (2009)], (ii) external and internal habits, as in Alonso-Carrera et al (2007).…”

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“…Verplanken & Wood (2006) expresan que las intervenciones efectivas para cambiar hábitos implican alterar factores ambientales que inducen o activan el desempeño del hábito. En tanto que Ikefuji & Mino (2009) sostienen que además de las rutinas, la formación de hábitos está atravesada por un proceso individual. Para terminar, Hodgson (2007) sostiene que los mecanismos de replicación de los hábitos son incentivos, represión e imitación.…”

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