Habit Formation, Catching up with the Joneses, and Non-Scale Growth

Our objective is to provide some understanding on how alternative assumptions about preferences affect the process of economic growth. In this line, we solve a one-sector non-scale growth model under three alternative preference specification i) time separable, ii) catching up with the Joneses and iii) habit formation. Departing from the time separable specification leads to important differences in the dynamic structure, the adjustment path followed by key economic variables, the correlation patterns implied by the time series generated by the model, and the speed of convergence to the new steady state. In the catching up with the Joneses economy the differences arise from a consumption externality, while in the habit formation economy the difference arises from the fact that agents not only smooth consumption but also its rate of change