CFDP 1642R

Foundations of Intrinsic Habit Formation

Author(s): 

Publication Date: March 2008

Revision Date: March 2009

Pages: 39

Abstract: 

We provide theoretical foundations for several common (nested) representations of intrinsic linear habit formation. Our axiomatization introduces an intertemporal theory of weaning a decision-maker from her habits using the device of compensation. We clarify differences across specifications of the model, provide measures of habit-forming tendencies, and suggest methods for axiomatizing time-nonseparable preferences.

Supplemental material

Keywords: 

Time-nonseparable preferences, Linear habit formation, Weaning, Compensated separability, Gains monotonicity

JEL Classification Codes:  C60, D11, D90

Note: 

Published in Econometrica (July 2010), 78(4): 1341-1373 [DOI]