Foundations of Intrinsic Habit Formation
Posted: 4 Mar 2008
Date Written: March 2009
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: Linear habit formation, Time-nonseparable preferences, Compensation, Weaning, Compensated separability, Gains monotonicity, Endogenously generated auxiliary spaces
JEL Classification: C60, D11, D90
Suggested Citation: Suggested Citation