A nonparametric analysis of habits models

Ian Crawford

No CWP30/07, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract:

This paper presents a nonparametric analysis of the canonical habits model. The approach is based on the combinatorial/revealed preference framework of Samuelson (1948), Houthakker (1950), Afriat (1967) and Varian (1982) and the extenstion and application of these ideas to intertemporal models in Browning (1989). It provides a simple finitely computable test of the model which does not require a parameterisation of the underlying (hypothesised) preferences.It also yields set identification of important features of the canonical habits model including the consumer's rate of time preference and the welfare effects of habit-formation. The ideas presented are illustrated using Spanish panel data.

Date: 2007-12-01
New Economics Papers: this item is included in nep-ecm and nep-ore
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