Masako Ikefuji
Habit Formation in an Endogenous Growth Model with Pollution Abatement Activities

Abstract: This paper studies how the habit formation in consumption affects pollution abatement activities and the steady-state growth rate, in the context of an endogenous growth model in which agents derive disutility from the habit stock and pollution. The paper also examines how the effect of technological change in abatement on the optimal growth rate is enhanced or weakened by habit formation. We show that if agents persist in and care about their habits, sustained growth is only possible with rapid technological progress.

JEL: D91, O40.
Keywords: habit formation, abatement cost and benefit, technological change.



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