Foundations of Intrinsic Habit Formation
Econometrica · 2010 · Volume 78 · Issue 4
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.
Keywords
Time-nonseparable preferences, linear habit formation, weaning, compensated separability, gains monotonicity
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