Deep Habits in Consumption: A Spatial Panel Analysis Using Scanner Data

Using scanner data from a large European retailer, this paper empirically assesses deep habit formation in consumption. Deep habit formation constitutes a possible source of price stickiness and helps to mimic procyclical labour and real wage dynamics that are present in macro data. To gauge the existence and the extent of deep habits in consumption, we estimate a dynamic timespace simultaneous model for consumption expenditure at different levels of product aggregation. This spatial panel model enables us to test for both internal and external deep habit formation at the same time. The former captures inertia or persistence in consumption, and is included in the empirical specification as a time lag. The latter captures preference interdependence across households and is captured by a spatial lag. Our results show mixed evidence with respect to internal habit formation, whereas the external habit effect is almost always positive and significant.