Date of this Version
American Economic Review, Papers and Proceedings
This paper introduces a utility function that nests three classes of utility functions: (1) time-separable utility functions; (2) "catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and (3) utility functions that display habit formation. Closed-form solutions for equilibrium asset prices are derived under the assumption that consumption growth is i.i.d. The equity premia under catching up with the Joneses and under habit formation are, for some parameter values, as large as the historically observed equity premium in the United States.
Copyright © 1990 by the American Economic Association.Abel, Andrew B. "Asset Prices under Habit Formation and Catching up with the Joneses." The American Economic Review 80, no. 2 (1990): 38-42.
Abel, A. B. (1990). Asset Prices under Habit Formation and Catching Up with the Joneses. American Economic Review, Papers and Proceedings, 80 (2), 38-42. Retrieved from https://repository.upenn.edu/fnce_papers/224
Date Posted: 27 November 2017
This document has been peer reviewed.