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A nonparametric analysis of habits models

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  • Ian Crawford

    () (Institute for Fiscal Studies and University of Oxford)

Abstract

This paper presents a nonparametric analysis of the canonical habits model. The approach is based on the combinatorial/revealed preference framework of Samuelson (1948), Houthakker (1950), Afriat (1967) and Varian (1982) and the extenstion and application of these ideas to intertemporal models in Browning (1989). It provides a simple finitely computable test of the model which does not require a parameterisation of the underlying (hypothesised) preferences.It also yields set identification of important features of the canonical habits model including the consumer's rate of time preference and the welfare effects of habit-formation. The ideas presented are illustrated using Spanish panel data.

Suggested Citation

  • Ian Crawford, 2007. "A nonparametric analysis of habits models," CeMMAP working papers CWP30/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:cemmap:30/07
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    File URL: http://cemmap.ifs.org.uk/wps/cwp3007.pdf
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    References listed on IDEAS

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    1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    2. Martin Browning & M. Dolores Collado, 2001. "The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates," American Economic Review, American Economic Association, vol. 91(3), pages 681-692, June.
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    6. Raquel Carrasco & José M. Labeaga & J. David López-Salido, 2005. "Consumption and Habits: Evidence from Panel Data," Economic Journal, Royal Economic Society, vol. 115(500), pages 144-165, January.
    7. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
    8. Meghir, Costas & Weber, Guglielmo, 1996. "Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis Using a U.S. Consumption Panel," Econometrica, Econometric Society, vol. 64(5), pages 1151-1181, September.
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    12. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
    13. Labeaga, Jose M., 1999. "A double-hurdle rational addiction model with heterogeneity: Estimating the demand for tobacco," Journal of Econometrics, Elsevier, vol. 93(1), pages 49-72, November.
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    17. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
    18. Browning, Martin, 1989. "A Nonparametric Test of the Life-Cycle Rational Expectations Hypothesis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 979-992, November.
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    20. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-763, Part I Ju.
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