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Conspicuous Consumption and Overlapping Generations

Author

Listed:
  • Wendner, Ronald
Abstract
This paper investigates household decisions, and optimal taxation in an overlapping generations model in which individual utility depends on a weighted average of consumption of ones peers --- a ``keeping up with the Joneses'' consumption externality. In contrast to representative agent economies, the consumption externality \emph{generally} affects steady state savings and growth rates. The nature of the externality's impact, however, critically depends on the rate at which labor productivity declines with age. For a (strongly enough) declining labor productivity (or when people gradually retire), the consumption externality \emph{lowers} the steady state propensity to consume out of total wealth. The opposite holds for a constant labor productivity. The market economy can be decentralized by a (reverse) unfunded social security system if the rate of labor productivity decline is high (low). In contrast to previous results, the \emph{optimal} steady state capital income tax is zero, in spite of the consumption externality.

Suggested Citation

  • Wendner, Ronald, 2009. "Conspicuous Consumption and Overlapping Generations," MPRA Paper 15527, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15527
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    References listed on IDEAS

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    Cited by:

    1. Wendner, Ronald, 2010. "Growth And Keeping Up With The Joneses," Macroeconomic Dynamics, Cambridge University Press, vol. 14(S2), pages 176-199, November.

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    More about this item

    Keywords

    Consumption externality; labor productivity; gradual retirement; overlapping generations; keeping up with the Joneses; optimal taxation; capital taxation;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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