Foundations of Intrinsic Habit Formation
We provide theoretical foundations for several common (nested) representations of intrinsic linear habit formation. These representations are dynamically consistent and additive, with geometrically decaying coefficients of habit formation. Our axiomatization introduces a revealed preference theory of weaning a decision-maker from her habits using the device of compensation. We characterize linear habit formation in terms of the ability to wean using uniquely determined compensating streams. Moreover, we distinguish between habits that are responsive to weaning and those that are persistent, develop a simple choice-theoretic measure of the rate of habit decay, and demonstrate how to recover the entire sequence of habit formation coefficients from observed choice behavior. We introduce novel monotonicity and separability axioms that are appropriate for time-nonseparable preferences. Our analysis suggests techniques for eliciting dynamic reference points from choice behavior and obtaining discounted utility representations on endogenously generated auxiliary spaces.
|Date of creation:||Mar 2008|
|Publication status:||Published in Econometrica, 2010|
|Contact details of provider:|| Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.yale.edu/
More information through EDIRC
|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shalev, Jonathan, 1997.
"Loss aversion in a multi-period model,"
Mathematical Social Sciences,
Elsevier, vol. 33(3), pages 203-226, June.
- Abel, A.B., 1990.
"Asset Prices Under Habit Formation And Catching Up With The Joneses,"
Weiss Center Working Papers
1-90, Wharton School - Weiss Center for International Financial Research.
- Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
- A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
- Andrew B. Abel, "undated". "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 01-90, Wharton School Rodney L. White Center for Financial Research.
- Andrew B. Abel, "undated". "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 1-90, Wharton School Rodney L. White Center for Financial Research.
- Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
- Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
- David K. Backus & Bryan R. Routledge & Stanley E. Zin, 2005.
"Exotic Preferences for Macroeconomists,"
in: NBER Macroeconomics Annual 2004, Volume 19, pages 319-414
National Bureau of Economic Research, Inc.
- David Backus & Bryan Routledge & Stanley Zin, 2004. "Exotic Preferences for Macroeconomists," NBER Working Papers 10597, National Bureau of Economic Research, Inc.
- David Backus & Bryan Routledge & Stanley Zin, 2004. "Exotic Preferences for Macroeconomists," Working Papers 04-20, New York University, Leonard N. Stern School of Business, Department of Economics.
- Gary S. Becker & Kevin M. Murphy, 1986.
"A Theory of Rational Addiction,"
University of Chicago - George G. Stigler Center for Study of Economy and State
41, Chicago - Center for Study of Economy and State.
- Jody Overland & Christopher D. Carroll & David N. Weil, 2000.
"Saving and Growth with Habit Formation,"
American Economic Review,
American Economic Association, vol. 90(3), pages 341-355, June.
- Christopher D. Carroll & Jody Overland & David N. Weil, 2000. "Mathematica code for 'Saving and Growth with Habit Formation' and 'Comparison Utility in a Growth Model'," QM&RBC Codes 43, Quantitative Macroeconomics & Real Business Cycles.
- 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.).
- Koszegi, Botond & Rabin, Matthew, 2004.
"A Model of Reference-Dependent Preferences,"
Department of Economics, Working Paper Series
qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Xiaohong Chen & Sydney C. Ludvigson, 2004. "Land of Addicts? An Empirical Investigation of Habit-Based Asset Pricing Behavior," NBER Working Papers 10503, National Bureau of Economic Research, Inc.
- Wendner, Ronald, 2003. "Do habits raise consumption growth?," Research in Economics, Elsevier, vol. 57(2), pages 151-163, June.
- Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
- Shi, Shouyong & Epstein, Larry G, 1993. "Habits and Time Preference," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 61-84, February.
- Boldrin, Michele & Christiano, Lawrence J. & Fisher, Jonas D.M., 1997.
"Habit Persistence And Asset Returns In An Exchange Economy,"
Cambridge University Press, vol. 1(02), pages 312-332, June.
- Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1997. "Habit persistence and asset returns in an exchange economy," Working Paper Series, Macroeconomic Issues WP-97-04, Federal Reserve Bank of Chicago.
- Ignacio Palacios-Huerta, 2001. "Multiple Addictions," Working Papers 2001-20, Brown University, Department of Economics.
- Kozicki, Sharon & Tinsley, P. A., 2002.
"Dynamic specifications in optimizing trend-deviation macro models,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 26(9-10), pages 1585-1611, August.
- Sharon Kozicki & Peter A. Tinsley, 2001. "Dynamic specifications in optimizing trend-deviation macro models," Research Working Paper RWP 01-03, Federal Reserve Bank of Kansas City.
- Uribe, Martin, 2002. "The price-consumption puzzle of currency pegs," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 533-569, April.
- Iannaccone, Laurence R., 1986. "Addiction and satiation," Economics Letters, Elsevier, vol. 21(1), pages 95-99.
- William Neilson, 2006. "Axiomatic reference-dependence in behavior toward others and toward risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(3), pages 681-692, 08.
When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1642. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthew C. Regan)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.