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Intertemporal Choice under Habit Formation

In: Handbook of Experimental Economics Results

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  • Fehr, Ernst
  • Zych, Peter K.

Abstract

Many of the most important choices in people's lives have an inter-temporal dimension, i.e., these choices are associated with a flow of benefits or costs that accrue in the future. In addition, such choices are frequently habit-forming. Yet, little is known about habit-forming inter-temporal choice behavior. This paper reports the results of an inter-temporal choice experiment with habit-formation. Subjects' choices deviate systematically from individually optimal decisions in the direction of over-consumption. This over-consumption is partly driven by loss avoidance, comparable to a real life situation in which addicted people consume addictive substances only in order to overpower withdrawal symptoms. Our results thus reject the theory of rational addiction.
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Suggested Citation

  • Fehr, Ernst & Zych, Peter K., 2008. "Intertemporal Choice under Habit Formation," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 98, pages 923-928, Elsevier.
    • Handle: RePEc:eee:expchp:7-98
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    References listed on IDEAS

    as
    1. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    2. repec:bla:scandj:v:100:y:1998:i:3:p:643-62 is not listed on IDEAS
    3. Ernst Fehr & Peter K. Zych, 1998. "Do Addicts Behave Rationally?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 643-661, September.
    4. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
    5. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
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    Cited by:

    1. Helmuth Cremer & Philippe De Donder & Darío Maldonado & Pierre Pestieau, 2008. "Habit Formation and Labor Supply," CESifo Working Paper Series 2351, CESifo.
    2. Ernst Fehr & Lorenz Goette, 2000. "How Robust are Nominal Wage Rigidities?," Econometric Society World Congress 2000 Contributed Papers 0071, Econometric Society.
    3. Carbone, Enrica & Duffy, John, 2014. "Lifecycle consumption plans, social learning and external habits: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 413-427.
    4. Cremer Helmuth & De Donder Philippe & Maldonado Dario & Pestieau Pierre, 2010. "Commodity Taxation under Habit Formation and Myopia," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-27, September.
    5. Schenk-Hoppe, Klaus Reiner & Schmalfu[ss], Bjorn, 2001. "Random fixed points in a stochastic Solow growth model," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 19-30, September.

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