Habit Formation and Keeping Up with the Joneses: Evidence from Micro Data
47 Pages Posted: 5 Sep 2006 Last revised: 14 Aug 2019
Date Written: April 20, 2019
Abstract
This paper provides evidence of habit persistence in household consumption choices. I find that the strength of external habit, captured by the fraction of the consumption of the reference group that enters the utility function, is 0.290, and the strength of internal habit, represented by household past consumption, is 0.503. The results are robust to controlling for various measures of economic activity, tests for the presence of aggregate shocks, liquidity constraints, precautionary saving motives, and learning. Aggregation of the Euler equations as a weighted average of individual marginal rates of substitution accounts for heterogeneity and market incompleteness and preserves the results.
Keywords: Habit Persistence, Micro Data, Household Finance, Social Interactions
JEL Classification: G12, E21, D12
Suggested Citation: Suggested Citation
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