YALE DEPARTMENT OF ECONOMICS
WORKING PAPER NO. 40R

FOUNDATIONS OF INTRINSIC HABIT FORMATION

Kareen Rozen

Revised March 2009

Abstract

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: time-nonseparable preferences, linear habit formation, weaning, compensated separabillity, gains monotonicity

JEL Classification: C60, D11, D90