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Habit Formation: A Kind of Prudence?

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  • Aylin Seckin
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    Abstract

    In this paper we have examined the relationship between habit formation and Kimball's concept of prudence. Using first, Kimball's two-period model we have shown that habit formation leads to a larger prudence premium and greater precautionary saving, provided that the individual has decreasing absolute prudence. Then, we have extended the model to investigate the relationship between prudence and habit formation in a multi-period framework. We have shown that, even when there is no habit formation, the prudence premium is not unambiguously positive unless the marginal propensity out of wealth is constant. Then we have found that it is not possible to conclude, even with the utility function exhibiting a simple form of habit formation, that habits increase or decrease the precautionary premium ''in the sense of Kimball'' when there exists multiple periods. Dans cet article, nous avons examiné la relation entre la formation d'habitudes et le concept de prudence de Kimball. En utilisant d'abord le modèle de deux périodes de Kimball, nous avons démontré que la formation d'habitudes mène à une prime de prudence plus élevée et une plus grande épargne précautionnelle, pourvu que l'individu ait une prudence absolue décroissante. Nous avons ensuite développé le modèle afin d'investiguer la relation entre prudence et formation d'habitudes dans un sytème à multiples périodes. Nous avons démontré que, même s'il n'y a pas de formation d'habitudes, la prime de prudence n'est pas positive sauf si la propension marginale à la richesse est constante. Par la suite, nous avons trouvé qu'il n'est pas possible de conclure, même dans le cas d'une fonction d'utilité avec une simple formation d'habitudes, que les habitudes augmentent ou diminuent la prime précutionnelle à la Kimball quand il y a de multiples périodes.

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    Bibliographic Info

    Paper provided by CIRANO in its series CIRANO Working Papers with number 2000s-42.

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    Date of creation: 01 Oct 2000
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    Handle: RePEc:cir:cirwor:2000s-42

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    Related research

    Keywords: Habit formation; prudence; Formation d'habitudes; prudence;

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    References

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    1. Kimball, Miles S & Weil, Philippe, 2003. "Precautionary Saving and Consumption Smoothing Across Time and Possibilities," CEPR Discussion Papers 4005, C.E.P.R. Discussion Papers.
    2. Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series 95-42, Board of Governors of the Federal Reserve System (U.S.).
    3. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
    4. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
    5. Wayne E. Ferson & George M. Constantinides, 1991. "Habit Persistence and Durability in Aggregate Consumption: Empirical Tests," NBER Working Papers 3631, National Bureau of Economic Research, Inc.
    6. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    7. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
    8. Karen E. Dynan, 1993. "Habit formation in consumer preferences: evidence from panel data," Working Paper Series / Economic Activity Section 143, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. Arjen Siegmann, 2003. "Shortfall allowed: loss aversion and habit formation," WO Research Memoranda (discontinued) 741, Netherlands Central Bank, Research Department.

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