Dynamic Game Model of Endogenous Growth with Consumption Externalities

Abstract

Abstract. This paper introduces consumption externalities into an endogenous growth model of common capital accumulation and characterizes balanced growth equilibria. Contrary to the standard argument in previous studies, we show that the growth rate in a feedback Nash equilibrium can be higher than that in an open-loop Nash equilibrium if agents strongly admire the consumption of others. This result is irrelevant to whether preferences exhibit "keeping up with the Joneses" or "running away from the Joneses".

Capital accumulation game with quasi-geometric discounting and consumption externalities

“…The relationship between the present study and the studies by Hori and Shibata (2010) and Long and Wang (2009) can be stated as follows. Hori and Shibata's (2010) focus is on differences in the characteristics of the feedback equilibrium and those of the open-loop equilibrium.…”

“…Long and Wang (2009) show that consumption externalities worsen the overconsumption problem in the case of a common resource. Hori and Shibata (2010) compare the growth rate in a nocommitment case (a feedback Nash equilibrium) with that in a commitment case (an open-loop Nash equilibrium). Contrary to the usual arguments, they show that the former growth rate can be higher than the latter growth rate when individuals admire the consumption of others.…”

“…In addition, neither Hori and Shibata (2010) nor Long and Wang (2009) consider individuals with hyperbolic discounting.…”