Econometrica: Jul 2010, Volume 78, Issue 4

Foundations of Intrinsic Habit Formation

https://doi.org/10.3982/ECTA7302
p. 1341-1373

Kareen Rozen

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.

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Supplemental Material

Supplement to "Foundations of Intrinsic Habit Formation"

This supplement contains additional results that combine with Lemmas 1-22 in Appendix A to prove Theorem 2, giving monotonicity properties of the period utility under Axiom GM.

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