A Variety-Expansion Model of Growth with External Habit Formation

Junko Doi () and Kazuo Mino
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Junko Doi: Kyoto Sangyo University

No 06-07, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper introduces external habit formation into one of the basic models of endogenous growth in which continuing expansion of product variety sustains long-term growth. We assume that households consume a range of final goods and they set a benchmark level of consumption for each good. The benchmark consumption is determined by external habit formation so that there are commodity-specific external effects. Each good is produced by a monopolistically competitive firm and the firm fs optimal pricing decision exploits the fact that consumers f demand is subject to the external habit formation. Given those settings, we show that the introduction of consumption externalities may affect the balanced-growth characterization, transitional dynamics as well as policy impacts in fundamental manners.

Keywords: consumption externalities; habit formation; monopolistic competition; R&Dbased growth model (search for similar items in EconPapers)
JEL-codes: E2 O3 O4 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-02
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: A variety-expansion model of growth with external habit formation (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:0607

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