When Do Habits Matter? The Empirical Content of Dynamic Hedonic Models

Josephine Auer

Papers from arXiv.org

Abstract: Hedonic models value goods through their characteristics but are typically interpreted under time-separable preferences. This assumption is restrictive: when some attributes are habit forming, observed prices reflect both contemporaneous utility and a continuation value. I develop a nonparametric revealed preference framework for dynamic hedonic valuation, deriving necessary and sufficient conditions for rationalisability. The framework separates restrictions imposed by the hedonic shadow-price representation from those imposed by intertemporal choice and provides diagnostics that quantify the severity of violations along each margin. Applied to household scanner data, I show that most failures of static hedonic valuation reflect breakdowns in the price representation while allowing for habit formation improves behavioural fit for a subset of households. The framework therefore shows when a dynamic interpretation of hedonic prices is empirically admissible and, more generally, how habit formation can change the mapping from prices to willingness-to-pay and welfare.

Date: 2026-03, Revised 2026-03
New Economics Papers: this item is included in nep-dcm
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