Consumption Externalities, Habit Formation and Equilibrium Efficiency*

Equilibrium portfolios with consumption externalities

We examine the equilibrium consumption and portfolio strategies in an economy with consumption externalities. We consider a model where the von Neumann-Morgenstern utility is a function of one's own consumption and of the average consumption in the economy in the corresponding state or date. We show that, under some conditions on the degree of conformism in the economy, the optimal portfolio an...

Consumption Models with Habit Formation

Consumption Models with Habit Formation

Equilibrium portfolios with heterogeneous consumption externalities

The present paper extends the Arrow-Debreu portfolio model to consumption externalities. It is assumed that each investor has a von NeumannMorgenstern utility that is a function of her own consumption and of the average consumption in the group to which she belongs. Individual degrees of risk aversion and conformism are heterogeneous within each group and between the different groups in the eco...

Solving Consumption Models with Habit Formation

The intuition for this equation is as follows. If λ, the parameter which controls how fast habits catch up with consumption, is equal to zero equation (6) reduces to the normal first order condition for the standard consumption optimization problem, which tells us that increasing consumption by today and reducing it by R in the next period must not change expected discounted utility. If λ is no...