Journal Article

Habits Revealed

Ian Crawford

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 4, pages 1382-1402
Published in print October 2010 | ISSN: 0034-6527
Published online October 2010 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1111/j.1467-937X.2010.00604.x
Habits Revealed

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This paper sets out necessary and sufficient empirical conditions for rational intrinsic habits models in the revealed preference tradition of Samuelson (1948), Houthakker (1950), Afriat (1967), and Browning (1989). The conditions in the paper are shown to be computationally straightforward and to yield set identification for certain features of the model. The ideas outlined are applied to a microeconomic panel dataset. The addition of habit formation to the discounted utility model is shown to improve the rationalizability of the microdata considerably. Even if habit formation is rejected, it is shown that modest and plausible allowance for heterogeneity in prices and interest rates is sufficient to bring consumption behaviour into line with the theory.

Journal Article.  10062 words.  Illustrated.

Subjects: Economics

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