A note on external habits and efficiency in the AK model |
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Authors: | Manuel A Gómez |
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Institution: | (1) UNC at, Charlotte, Belk College of Business, Charlotte, NC 28223, USA |
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Abstract: | This paper examines the implications for equilibrium efficiency of alternative formulations of habit formation in the AK model
with external habits. Agent’s utility depends on how her current consumption compares to a reference consumption level—the
habits stock—determined by average past consumption in the economy. We first prove that perfect substitutability between consumption
and habits along the equilibrium path is necessary and sufficient for efficiency. Then, we prove that the competitive equilibrium
is efficient if and only if habits enter utility in a subtractive form. |
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Keywords: | |
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