Abstract
This note analyzes the equilibrium dynamics in the neoclassical growth model with habit-forming preferences and elastic labor supply. Habits enter into utility in a multiplicative way. The specification of the habit formation process comprises the particular cases of internal and external habits. Existence, uniqueness and saddle-path stability of the steady state are proved analytically.
Highlights
This note analyzes the equilibrium dynamics in the neoclassical growth model with habit formation and elastic labor supply
The literature distinguishes between internal habits (IH), which are formed from individual’s own past consumption (e.g., [2,4]), and external habits (EH), which are formed from average economy-wide past consumption (e.g. [1,5])
We consider a specification of the habit formation process which comprises the particular cases of internal and external habits
Summary
This note analyzes the equilibrium dynamics in the neoclassical growth model with habit formation and elastic labor supply. In our model utility is additively separable and CRRA in adjusted consumption and leisure, and habits enter utility in a multiplicative way. These are specifications commonly used in the literature. Previous work has analyzed the equilibrium dynamics of growth models with habit formation, mainly in AKtype growth models This paper is related to previous works that study analytically the stability properties of equilibrium in growth models
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