Intertemporal Choice under Habit Formation
AbstractMany of the most important choices in people's lives have an inter-temporal dimension, i.e., these choices are associated with a flow of benefits or costs that accrue in the future. In addition, such choices are frequently habit-forming. Yet, little is known about habit-forming inter-temporal choice behavior. This paper reports the results of an inter-temporal choice experiment with habit-formation. Subjects' choices deviate systematically from individually optimal decisions in the direction of over-consumption. This over-consumption is partly driven by loss avoidance, comparable to a real life situation in which addicted people consume addictive substances only in order to overpower withdrawal symptoms. Our results thus reject the theory of rational addiction.
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 043.
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Inter-temporal Choice; Habit Formation; Addiction; Irrational Behaviour; Excess Consumption;
Other versions of this item:
- Fehr, Ernst & Zych, Peter K., 2008. "Intertemporal Choice under Habit Formation," Handbook of Experimental Economics Results, Elsevier, Elsevier.
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- I10 - Health, Education, and Welfare - - Health - - - General
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