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On the characterization of linear habit formation

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  • Gerelt Tserenjigmid

    (Virginia Tech)

Abstract

Habit formation models are widely used in macroeconomics and finance. However, little work has been done to characterize habit formation. In this paper, we provide a simple axiomatic foundation of linear habit formation models that satisfy the Markov (or memoryless) property. We also provide a method to characterize a general class of time-nonseparable but additive models that satisfy the Markov property.

Suggested Citation

  • Gerelt Tserenjigmid, 2020. "On the characterization of linear habit formation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 49-93, July.
    • Handle: RePEc:spr:joecth:v:70:y:2020:i:1:d:10.1007_s00199-019-01202-x
    DOI: 10.1007/s00199-019-01202-x
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    References listed on IDEAS

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    3. Morhaim, Lisa & Ulus, Ayşegül Yıldız, 2023. "On history-dependent optimization models: A unified framework to analyze models with habits, satiation and optimal growth," Journal of Mathematical Economics, Elsevier, vol. 105(C).
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    More about this item

    Keywords

    Linear habit formation; Axiomatization; Markov property; Cancellation; Invariant Habit Compensation;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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