Comparison Utility in a Growth Model

42 Pages Posted: 19 Jan 1998 Last revised: 7 May 2000

See all articles by Christopher D. Carroll

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Jody R. Overland

Independent

David N. Weil

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 1997

Abstract

This paper compares the dynamics of two general equilibrium models of endogenous growth in which agents have comparison utility.' In the inward-looking' economy, individuals care about how their consumption in the current period compares to their own consumption in the past (one way to describe this is habit-formation' in consumption). In the outward-looking' economy, individuals care about how their own level of consumption compares with others' consumption. Consider the effect of negative shock to capital. In an endogenous growth model with standard preferences, there will be no effect on the saving rate or the growth rate of output. In both of the models that we consider, however, saving and growth will temporarily fall in response to the shock. The initial decline in saving and growth will be larger in the inward-looking case. However, since agents in the outward-looking case do not take into account the externality effect of their consumption, higher growth in this case will lead to lower utility than in the inward-looking case.

Suggested Citation

Carroll, Christopher D. and Overland, Jody R. and Weil, David Nathan, Comparison Utility in a Growth Model (August 1997). NBER Working Paper No. w6138. Available at SSRN: https://ssrn.com/abstract=48654

Christopher D. Carroll (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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Jody R. Overland

Independent ( email )

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David Nathan Weil

Brown University - Department of Economics ( email )

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Providence, RI 02912
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401-863-1970 (Fax)

National Bureau of Economic Research (NBER)

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