Resumen de Welfare implications of the interactions between habits and consumption externalities

Jaime Alonso Carrera, Xavier Raurich Puigdevall, Jordi Caballé

• We analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an infficient dynamic equilibrium. In particular, we show that the competitive equilibrium is inefficient when consumption externalities and habit adjusted consumption are not perfect substitutes.