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Habit Formation and the Theory of Addiction

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  • Messinis, George

Abstract

In the light of repeated rejections of the Hall (1978) version of the life cycle-permanent income hypothesis and other empirical puzzles, the habit formation hypothesis has increased in popularity since the 1980s. However, existing formulations of habit persistence do not always perform well empirically. This paper pursues two objectives: (i) to outline the habit persistence hypothesis, and (ii) to review the theory of addiction with a focus on issues of relevance to the theory of consumption. In the literature on addiction, two research traditions are discernible: rational addiction and myopic addiction. The former approach emphasises forward-looking behaviour and defines memory loss as a univariate process. The latter relies on multiple objectives and highlights the role of contractual behaviour. The paper argues that future research in consumption with habits ought to pay more attention to non-separabilities, allow for multivariate processes when modelling memory loss and consider rational habit modification. Copyright 1999 by Blackwell Publishers Ltd

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

Volume (Year): 13 (1999)
Issue (Month): 4 (September)
Pages: 417-42

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Handle: RePEc:bla:jecsur:v:13:y:1999:i:4:p:417-42

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Cited by:
  1. Emmanuel PETIT (GREThA UMR CNRS 5113), 2010. "The role of regret in the persistence of anomalies in financial markets (In French)," Cahiers du GREThA 2010-07, Groupe de Recherche en Economie Théorique et Appliquée.
  2. Takanori Ida, 2012. "Impatience and Immediacy: A Quasi-Hyperbolic Discounting Approach to Smoking Behavior," Discussion papers e-11-010, Graduate School of Economics Project Center, Kyoto University.
  3. Anne Bretteville-Jensen, 2006. "Drug Demand – Initiation, Continuation and Quitting," De Economist, Springer, vol. 154(4), pages 491-516, December.
  4. Henry, O. & Messinis, G. & Olekalns, N., 1999. "Rational Habit Modification: the Role of Credit," Department of Economics - Working Papers Series 729, The University of Melbourne.
  5. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79951, Verein für Socialpolitik / German Economic Association.
  6. Ronen Bar-El & Teresa García-Muñoz & Shoshana Neuman & Yossef Tobol, 2010. "The Evolution of Secularization: Cultural Transmission, Religion and Fertility Theory, Simulations and Evidence," Working Papers 2010-10, Department of Economics, Bar-Ilan University.
  7. Luca Bossi & Vladimir Petkov, 2007. "Habits, Market Power, and Policy Selection," Working Papers 0702, University of Miami, Department of Economics.
  8. Luisa Corrado & Sean Holly, 2004. " Habit Formation and Interest Rate Smoothing," CDMA Conference Paper Series 0404, Centre for Dynamic Macroeconomic Analysis.
  9. Ida, Takanori & Goto, Rei, 2009. "Interdependency among addictive behaviours and time/risk preferences: Discrete choice model analysis of smoking, drinking, and gambling," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 608-621, August.
  10. Wendner, Ronald, 2003. "Do habits raise consumption growth?," Research in Economics, Elsevier, vol. 57(2), pages 151-163, June.
  11. Sebastian Koehne & Moritz Kuhn, 2014. "Optimal Taxation in a Habit Formation Economy," CESifo Working Paper Series 4581, CESifo Group Munich.
  12. Stracca, Livio, 2004. "Behavioral finance and asset prices: Where do we stand?," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 373-405, June.
  13. repec:ebl:ecbull:v:5:y:2006:i:17:p:1-4 is not listed on IDEAS
  14. Luca Bossi & Pere Gomis-Porqueras, 2006. "Deficit financing in overlapping generation economies with habit persistence," Economics Bulletin, AccessEcon, vol. 5(17), pages 1-4.

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