Econometrica: Jul 2010, Volume 78, Issue 4
Foundations of Intrinsic Habit Formation
Kareen RozenWe 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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