Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Mar, 2016, Volume 84, Issue 2

Consumption Commitments and Habit Formation
p. 855-890

Raj Chetty, Adam Szeidl

We analyze the implications of household‐level adjustment costs for the dynamics of aggregate consumption. We show that an economy in which agents have “consumption commitments” is approximately equivalent to a habit formation model in which the habit stock is a weighted average of past consumption if idiosyncratic risk is large relative to aggregate risk. Consumption commitments can thus explain the empirical regularity that consumption is excessively sensitive and excessively smooth, findings that are typically attributed to habit formation. Unlike habit formation and other theories, but consistent with empirical evidence, the consumption commitments model also predicts that excess sensitivity and smoothness vanish for large shocks. These results suggest that behavior previously attributed to habit formation may be better explained by adjustment costs. We develop additional testable predictions to further distinguish the commitment and habit models and show that the two models have different welfare implications.

Log In To View Full Content

Supplemental Material

Supplement to "Consumption Commitments and Habit Formation"

This zip file contains the replication files for the manuscript.

Supplement to "Consumption Commitments and Habit Formation"

This material provides missing proofs for results stated in the main paper and explains the numerical methods used to simulate the model.

Journal News